F-1 1 d195054df1.htm FORM F-1 Form F-1
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As filed with the Securities and Exchange Commission on March 3, 2014

Registration No. 333-            

 

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

iKang Healthcare Group, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Cayman Islands   8000   Not Applicable
(State or Other Jurisdiction of
Incorporation or Organization)
 

(Primary Standard Industrial

Classification Code Number)

  (I.R.S. Employer
Identification Number)

B-6F, Shimao Tower

92A Jianguo Road

Chaoyang District, Beijing 100022

People’s Republic of China

(+86) 10-5320-6688

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

 

Law Debenture Corporate Services Inc.

400 Madison Avenue, 4th Floor

New York, New York 10017

(212) 750-6474

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

 

 

Copies to:

 

Howard Zhang, Esq.

Li He, Esq.

Davis Polk & Wardwell LLP

2201 China World Office 2

1 Jian Guo Men Wai Avenue, Chaoyang District

Beijing 100004, People’s Republic of China

(+8610) 8567-5000

 

Chris K.H. Lin, Esq.

Daniel Fertig, Esq.

Simpson Thacher & Bartlett LLP

c/o 35th Floor, ICBC Tower

3 Garden Road

Central, Hong Kong

(+852) 2514-7600

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title Of Each Class
Of Securities To Be Registered
  Proposed Maximum Aggregate
Offering Price(3)
  Amount Of
Registration Fee

Class A common shares, par value US$0.01 per share(1)(2)

  US$150,000,000   US$19,320

 

 

(1) American depositary shares issuable upon deposit of the Class A common shares registered hereby will be registered pursuant to a separate registration statement on Form F-6 (Registration No. 333-            ). Each American depositary share represents              Class A common shares.
(2) Includes (a) Class A common shares represented by American depositary shares initially offered and sold outside the United States that may be resold from time to time in the United States either as part of their distribution or within 40 days after the later of the effective date of this registration statement and the date the shares are first bona fide offered to the public, and (b) Class A common shares represented by American depositary shares that are issuable upon the exercise of the underwriters’ option to purchase additional ADSs. These Class A common shares are not being registered for the purposes of sales outside the United States.
(3) Estimated solely for the purpose of computing the amount of registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where such offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED             , 2014

PRELIMINARY PROSPECTUS

             American Depositary Shares

 

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iKang Healthcare Group, Inc.

Representing             Class A Common Shares

This is an initial public offering of American depositary shares, or ADSs, of iKang Healthcare Group, Inc. We are offering              ADSs. Each ADS represents              Class A common shares, par value US$0.01 per share, of iKang Healthcare Group, Inc.

Prior to this offering, there has been no public market for our ADSs or our shares. We have applied to list the ADSs on the NASDAQ Global Select Market under the symbol “KANG.” It is currently estimated that the initial public offering price per ADS will be between US$             and US$            .

We are an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended, or the Securities Act, and Section 3(a) of the Securities Exchange Act of 1934, as amended, or the Exchange Act.

See “Risk Factors” beginning on page 16 to read about factors you should consider before buying our ADSs.

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

     Per Share      Total  

Public offering price

   US$                    US$                

Underwriting discounts and commissions

   US$         US$     

Proceeds, before expenses, to iKang Healthcare Group, Inc.

   US$         US$     

To the extent that the underwriters sell more than              ADSs, the underwriters may purchase up to an additional              ADSs from us at the initial public offering price, less the underwriting discount.

Following this offering, we will have two classes of authorized ordinary shares, Class A common shares and Class C common shares. The rights of the holders of Class A and Class C common shares are identical, except with respect to voting and conversion rights. Each Class A common share will be entitled to one vote per share. Each Class C common share will be entitled to 15 votes per share and is convertible at any time into one Class A common share. Mr. Ligang Zhang will beneficially own all of our Class C common shares. Upon the completion of this offering, Mr. Ligang Zhang will own an amount of Class C common shares, which taken together with the Class A common shares beneficially owned by Mr. Ligang Zhang, shall allow him to control the exercise of 36% of our voting power. Upon an exercise of the underwriters’ over-allotment option, Class A common shares held by an affiliate of Mr. Ligang Zhang shall be redesignated to Class C common shares such that after such exercise, the amount of Class C common shares and Class A common shares beneficially owned by Mr. Ligang Zhang, will continue to allow him to control the exercise of 36% of our voting power. Assuming the underwriters have not exercised their over-allotment option to purchase additional ADSs, upon the completion of this offering, Mr. Ligang Zhang will beneficially own              Class C common shares; assuming full exercise, Mr. Ligang Zhang will beneficially own              Class C common shares. Our dual class common share structure involves certain risks. See the relevant risk factors on page 50 of this prospectus for a detailed discussion of such risks.

The underwriters expect to deliver the ADSs against payment in U.S. dollars in New York, New York on or about             , 2014.

(in alphabetical order)

 

BofA Merrill Lynch   UBS Investment Bank

 

 

Prospectus dated             , 2014


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TABLE OF CONTENTS

 

     Page  

Conventions that Apply to this Prospectus

     ii   

Prospectus Summary

     1   

The Offering

     9   

Summary Consolidated Financial Data

     12   

Risk Factors

     16   

Special Note Regarding Forward-Looking Statements

     54   

Our History and Corporate Structure

     55   

Use of Proceeds

     63   

Dividend Policy

     64   

Capitalization

     65   

Dilution

     67   

Exchange Rate Information

     69   

Enforceability of Civil Liabilities

     70   

Selected Consolidated Financial Data

     72   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     76   

Our Industry

     118   

Business

     125   

Regulation

     142   

Management

     153   

Principal Shareholders

     160   

Related Party Transactions

     163   

Description of Share Capital

     169   

Description of American Depositary Shares

     178   

Shares Eligible for Future Sale

     191   

Taxation

     193   

Underwriting

     200   

Expenses Relating to this Offering

     209   

Legal Matters

     209   

Experts

     209   

Where You Can Find Additional Information

     209   

Index to Consolidated Financial Statements

     F-1   

You should rely only on the information contained in this prospectus or in any related free writing prospectus filed with the Securities and Exchange Commission, or the SEC, in connection with this offering. Neither we nor the underwriters have authorized anyone to provide you with additional information or information different from that contained in this prospectus or in any free writing prospectus. We are offering to sell, and seeking offers to buy, ADSs only in jurisdictions where offers and sales are permitted. The information contained in this prospectus or in any free writing prospectus is accurate only as of its date, regardless of the time of delivery of this prospectus or of any sale of ADSs.

We have not taken any action to permit a public offering of the ADSs outside the United States or to permit the possession or distribution of this prospectus outside the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about and observe any restrictions relating to the offering of the ADSs and the distribution of this prospectus outside the United States.

Until             , 2014 (the 25th day after the date of this prospectus), all dealers that buy, sell or trade ADSs, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

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CONVENTIONS THAT APPLY TO THIS PROSPECTUS

Except where the context otherwise indicates and for the purpose of this prospectus only:

 

   

“ADSs” refers to our American depositary shares, each of which represents Class A common shares, and “ADRs” are to the American depositary receipts that evidence our ADSs;

 

   

“China” or “PRC” refers to the People’s Republic of China, excluding Hong Kong, Macau and Taiwan;

 

   

“fiscal 2010,” “fiscal 2011” and “fiscal 2012” means the 12-month periods ended March 31, 2011, 2012 and 2013, respectively; references to years not specified as being fiscal years are calendar years;

 

   

“RMB” or “Renminbi” refers to the legal currency of China. “US$,” “U.S. dollars,” or “dollars” refers to the legal currency of the United States;

 

   

“tier-1 cities” or “first tier cities” refer to Beijing, Shanghai, Guangzhou and Shenzhen; “tier-2 cities” or “second tier cities” refer to all provincial capitals and municipalities, except for the first tier cities; and “third tier cities” refer to other municipal cities except for tier-1 cities and tier-2 cities in China; and

 

   

“we,” “us,” “our company,” and “our” refer to iKang Healthcare Group, Inc., a Cayman Islands company, predecessor entities, subsidiaries and affiliated entities.

Renminbi amounts shown in this prospectus are accompanied by translations into U.S. dollars solely for the convenience of the reader. In addition, certain PRC economic and market data shown in U.S. dollars in this prospectus have been translated from Renminbi amounts. Unless otherwise noted, all such translations from Renminbi to U.S. dollars in this prospectus were made at RMB6.2108 to US$1.0000, the noon buying rate for March 29, 2013 set forth in the H.10 statistical release of the Federal Reserve Board. We make no representation that the Renminbi or U.S. dollar amounts referred to in this prospectus could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all. The PRC government restricts the conversion of Renminbi into foreign currency and foreign currency into Renminbi for certain types of transactions. On February 21, 2014, the noon buying rate set forth in the H.10 statistical release of the Federal Reserve Board was RMB6.0912 to US$1.0000.

 

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PROSPECTUS SUMMARY

This summary highlights selected information appearing elsewhere in this prospectus. This summary may not contain all of the information you should consider before investing in our ADSs. You should carefully read this prospectus, including our financial statements and related notes and the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus, and the registration statement of which this prospectus is a part in their entirety before investing in our ADSs, especially the risks of investing in our ADSs, which we discuss under “Risk Factors.” This prospectus contains statistical data extracted from a report which we commissioned Frost & Sullivan, an independent market research firm, to prepare in 2013 for the purpose of providing information on China’s healthcare market. “Fiscal 2010,” “fiscal 2011” and “fiscal 2012” means the 12-month periods ended March 31, 2011, 2012 and 2013, respectively. References to years not specified as being fiscal years are calendar years.

Overview

We are the largest provider in China’s fast growing private preventive healthcare services market, accounting for approximately 11.6% of market share in terms of revenue in 2012, according to Frost & Sullivan. Through our integrated service platform and established nationwide network of medical centers and third-party service provider facilities, we provide comprehensive and high quality preventive healthcare solutions including a wide range of medical examinations services and value-added services including disease screening and other services. Our customers are primarily corporate customers who contract us to provide medical examination services to their employees and clients and pay for these services at pre-negotiated prices. We also directly market our services to individual customers. In fiscal 2012, we delivered our services to approximately 1.9 million individuals in total, including the employees and clients of our corporate customers.

Chronic diseases are becoming more prevalent in China. According to Frost & Sullivan, the number of people with hypertension, diabetes and hyperlipidemia increased 89%, 97% and 71%, respectively, from 2001 to 2012. With the rising incidence of chronic diseases, more and more people are realizing the importance and benefits of preventive healthcare services. Currently, medical examinations are not typically covered by health insurance policies in China. Although the majority of medical examinations are still performed in public hospitals, an increasing number of customers are choosing private providers who offer quality services at affordable prices.

As of December 31, 2013, our nationwide network consisted of 42 self-owned medical centers, which contributed the majority of our revenue. Our self-owned medical center network covers 13 of the most affluent cities in China, namely Beijing, Shanghai, Guangzhou, Shenzhen, Chongqing, Tianjin, Nanjing, Suzhou, Hangzhou, Chengdu, Fuzhou, Changchun and Jiangyin. We have also supplemented our self-owned medical center network by contracting with approximately 300 third-party service provider facilities which include selected independent medical examination centers and hospitals across all of China’s provinces, creating a nationwide network that allows us to serve our customers in markets where we do not have self-owned medical centers.

Our nationwide network offers a wide range of medical examination services and provides a “one-stop” solution to our corporate customers which have a broad geographic footprint in China. As a single point of contact for our corporate customers, we provide consistent and high quality services to their employees and clients in different locations and reduce their administrative burden. We also provide our customers with professional consultation and medical referrals for additional as-needed diagnosis or treatment. Our centers are independent of hospitals and located in prime urban locations with an average size of 2,500 square meters. Equipped with advanced equipment and staffed with experienced medical professionals, each center provides a comfortable and friendly environment to our customers.

In fiscal 2012 and for the nine months ended December 31, 2013, we generated 83.2% and 79.2% of our net revenues from corporate customers, respectively, and the remainder from individual customers. In fiscal 2012,

 

 

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we served approximately 1.7 million individuals from approximately 11,200 corporate customers in various industries including financial services, telecommunications, retail, consumer goods and information technology, as well as approximately 206,000 individual customers. We served 71 of the 100 largest Chinese companies in 2012 as ranked by Forbes, including the ten largest commercial banks, as well as many other blue-chip Chinese companies. We also serve many large multinational companies in China, including 189 of the companies ranked in the 2013 Fortune Global 500. Among our top 50 customers in fiscal 2012, 90% have been our customers for more than four years. In addition, to cater to the increasing demand for even more extensive and higher quality medical services from China’s growing population of high-net-worth individuals, we opened two high-end medical examination centers under our iKang Evergreen brand in Nanjing and Beijing in September and December 2013, respectively.

We believe that we are at the forefront of the industry with our proprietary centralized information technology platform. We operate an online and telephonic health management and consultation system which provides our customers with convenient and hassle-free access to our nationwide network. We integrate third-party service providers into our network through customer scheduling and payment systems. Our information technology systems (i) allow individuals online and mobile access to their medical examination results and analytical tools that help them better understand their health conditions, (ii) enable corporate customers to monitor and analyze aggregated anonymous health data with respect to their employees, and (iii) enable us to track our operations and internal performance metrics which help us prioritize our marketing and sales efforts.

We have grown rapidly since our inception through both organic growth and strategic acquisitions. The number of our self-owned medical centers has grown from one in 2006 to 42 as of December 31, 2013. We have expanded our customer base from approximately 5,200 corporate customers in fiscal 2010 to approximately 11,200 corporate customers in fiscal 2012 and further to approximately 16,900 corporate customers in the nine months ended December 31, 2013. Total customer visits increased from approximately 1,067,000 in fiscal 2010 to approximately 1,381,000 in fiscal 2011 and to approximately 1,931,000 in fiscal 2012, representing a CAGR of 34.5%, and the number of total customer visits was approximately 2,306,000 for the nine months ended December 31, 2013. From fiscal 2010 to fiscal 2012, our net revenues grew from US$68.2 million to US$133.9 million, representing a CAGR of 40.1%. Our net revenues reached US$172.8 million for the nine months ended December 31, 2013.

Industry Background

Preventive healthcare services seek to detect and prevent diseases or injuries, improve the overall health condition and quality of life while lowering potential future healthcare costs. According to Frost & Sullivan, preventive healthcare services in China primarily consist of medical examinations, vaccination programs, women and children care and other services. These services have historically been offered by various state-owned or controlled medical institutions that are closely regulated by the PRC government. In April 2009, the PRC government issued Opinions on Deepening the Healthcare System Reform, which encouraged private investment in the healthcare system and relaxed restrictions on medical professionals practicing in multiple locations. As a result, an increasing number of private service providers have entered into the market and started offering medical examination services.

The private preventive healthcare services market in China, which primarily focuses on medical examination services, is an emerging market and has experienced rapid growth in the past decade. According to Frost & Sullivan, the total market grew from RMB2.4 billion (US$0.4 billion) in 2008 to RMB7.2 billion (US$1.2 billion) in 2012, representing a CAGR of 31.3% and is expected to continue to grow from 2012 at a CAGR of 31.9% and reach RMB28.5 billion (US$4.6 billion) by the end of 2017. According to Frost & Sullivan, recent trends have shown that private service providers have begun to increase their share of medical examination service market due to their customer-centric services, customized offerings, nationwide access, and

 

 

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other information technology-enabled features that are not often provided by public hospitals. According to Frost & Sullivan, in the next three to five years, the private medical examination market is expected to grow faster than the public medical examination market and gain more market shares. This market is relatively fragmented with hundreds of private service providers. The major players in the market with relatively significant market shares are companies with multiple locations, either across China or regionally. According to Frost & Sullivan, the top five companies in terms of revenues in 2012 were all domestic companies. Private preventive healthcare services providers primarily target corporate customers and individual customers with medium to high income. Although individual customers are providing increased revenue contribution, according to Frost & Sullivan, corporate customers accounted for approximately 80% to 90% of the medical examinations performed by private healthcare service providers in recent years.

In the United States and other developed countries, medical examination services are primarily provided by family practice physicians and are typically covered by medical insurance. Insurance companies in these countries designate the tests and procedures included in medical examination packages based on their risk analysis for certain diseases taking into account various factors such as age, gender and medical history of the entire insured group. Although medical examinations are not typically covered by medical insurance in China, the medical examination industry including privately owned and operated medical examination centers has been growing fast in China. This is largely driven by a rising population of middle-class and wealthy individuals who pay more attention to disease prevention and improved benefits provided by large corporations for their employees. According to Frost & Sullivan, the number of individuals with annual disposable incomes from US$3,500 to US$21,000 was approximately 213.2 million in 2011 and will grow to 355.5 million in 2015. Individuals seek comprehensive medical examinations and other targeted disease screenings at these medical examination centers. With rising health awareness in China, we believe the preventive healthcare market including the private preventive healthcare market will continue to grow substantially in the future.

Our Strengths

We believe the following strengths have contributed to our success and differentiated us from our competitors:

 

   

Unique business model addressing the increasing demand for preventive healthcare in China;

 

   

Leading position in a fast growing market;

 

   

Successful track record of acquisition integration and new center development;

 

   

Large and loyal customer base built on our recognized brand name and supported by our multiple sales channels;

 

   

Sophisticated proprietary information technology systems; and

 

   

Experienced management team with strong industry expertise and successful track records.

Our Strategies

Our goal is to further strengthen our leading position in the private preventive healthcare services market in China and to continue to gain market share from the public sector by differentiating our preventive healthcare services from those provided by public hospitals. In the long run, by leveraging our growing network of medical centers, large and loyal customer base, established demographic and disease information database together with our sophisticated proprietary information systems, we plan to expand the scope of our service offerings to include other healthcare services and ultimately establish our company as a leading health management service provider in China. We intend to achieve our goal by implementing the following strategies:

 

   

Expand the breadth and depth of our services platform;

 

 

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Continue to expand our nationwide network coverage;

 

   

Expand our existing customer base and attract new customers;

 

   

Further upgrade our service standards to enhance customer experience; and

 

   

Continue to develop technology-enabled health management solutions and improve operational efficiency.

Risks and Uncertainties

Investing in our ADSs involves a high degree of risk. You should carefully consider the risks and uncertainties summarized below, the risks described under “Risk Factors” beginning on page 16 of, and the other information contained in, this prospectus before you decide whether to purchase our ADSs:

 

   

We rely on corporate customers for a significant portion of our net revenues;

 

   

If we fail to manage our growth and our growth strategies effectively, our business, financial condition, results of operations and prospects may suffer;

 

   

We may not realize the anticipated benefits of our past and potential future investments or acquisitions or be able to recruit or integrate any acquired employees, businesses or products, which in turn may negatively affect their performance and respective contributions to our results of operations;

 

   

Our expansion into the high-end preventive healthcare services market, including the significant capital expenditure expenses involved, may present increased risks;

 

   

We could be liable and suffer reputational harm if a third-party service provider provides inferior service or harms a customer, which may have a material adverse effect on our business, financial condition, results of operations and prospects;

 

   

We operate in a competitive environment and competing facilities and services could harm our business, financial condition, results of operations and prospects;

 

   

Our business is heavily regulated. Failure to comply with applicable regulations and any changes in government policies or regulations could result in penalties, loss of licenses, additional compliance costs or other adverse consequences;

 

   

If the PRC government finds that the agreements that establish the structure for operating our business in China do not comply with its restrictions on foreign investment in healthcare and Internet-related businesses, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our economic benefits in the assets and operations of our affiliated PRC entities;

 

   

We rely on contractual arrangements with our affiliated PRC entities and their respective shareholders for the operation of our business, which may not be as effective as direct ownership. If our affiliated PRC entities and their shareholders fail to perform their obligations under these contractual arrangements, we may have to resort to litigation to enforce our rights, which may be time-consuming, unpredictable, expensive and damaging to our operations and reputation; and

 

   

Our PRC subsidiaries have contractual arrangements with four affiliated PRC entities, (i) Shanghai iKang Guobin Holding Co., Ltd., or iKang Holding, (ii) Hangzhou iKang Guobin Clinic Co., Ltd., or iKang Hangzhou Xixi, (iii) Shanghai Yuanhua Information Technology Co., Ltd., or Yuanhua Information, and (iv) Jiandatong Health Technology (Beijing) Co., Ltd., or Beijing Jiandatong. Mr. Ligang Zhang, chairman and chief executive officer of our company, and Mr. Boquan He, a director of our company, jointly hold iKang Holding and also indirectly hold iKang Hangzhou Xixi

 

 

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through iKang Holding. Mr. Haiqing Hu and Mr. Lei Zhao hold 80% and 20% of the equity interest in Yuanhua Information, respectively. Mr. Haiqing Hu and Mr. Rui Ma hold 80% and 20% of the equity interest in Beijing Jiandatong, respectively. These individuals, as shareholders of iKang Holding, Yuanhua Information and Beijing Jiandatong, may have a potential conflict of interest with us, and they may breach their contracts with us or cause such contracts to be amended in a manner contrary to the interest of our company.

 

   

Our holding company structure may restrict our ability to receive dividends or other payments from our PRC subsidiaries and our affiliated PRC entities, which could restrict our ability to act in response to changing market conditions and to satisfy our liquidity requirements.

Corporate Structure and History

In December 2003, ShanghaiMed Healthcare, Inc. was incorporated in the British Virgin Islands, or the BVI, and its name was changed to iKang Guobin Healthcare Group, Inc., or iKang Guobin, in February 2011. In February 2004, ShanghaiMed iKang, Inc., or Beijing iKang, was incorporated in China as a wholly-owned subsidiary of iKang Guobin to commence our preventive healthcare services in China.

In April 2007, Beijing iKang entered into a series of agreements with the shareholders of Shanghai iKang Guobin Holding Co. Ltd (formerly known as Shanghai Guobin Medical Holding Co. Ltd), or iKang Holding, in connection with a business combination, and entered into a series of contractual arrangements with iKang Holding and iKang Holding’s shareholders through which Beijing iKang gained effective control over iKang Holding. Since the transactions between Beijing iKang and iKang Holding in 2007, in an effort to further expand our service coverage in China, iKang Holding and its subsidiaries have acquired or constructed 35 medical centers in China. iKang Holding and its subsidiaries have completed the PRC approvals and registrations required for the establishment or acquisitions of such medical centers.

In September 2010, iKang Holding and Shanghai Yalong Daoyi Services Co., Ltd., or Yalong Daoyi, established Hangzhou iKang Guobin Clinic Co., Ltd. (formerly known as Hangzhou Hongkang Clinic Co., Ltd.), or iKang Hangzhou Xixi, with 80% and 20% equity interest, respectively. In January 2011, iKang Health Management (Zhejiang) Co., Ltd., or Zhejiang iKang, our other PRC subsidiary, entered into a series of contractual arrangements with iKang Hangzhou Xixi and the shareholders of iKang Hangzhou Xixi, iKang Holding and Yalong Daoyi, through which Zhejiang iKang gained effective control over the operations of iKang Hangzhou Xixi.

In July 2013, the company acquired a 100% equity interest in Yuanhua Medical Consultancy Services (Shanghai) Co., Ltd., or Yuanhua WFOE, which entered into a series of contractual arrangements with Yuanhua Information and Yuanhua Information’s shareholders through which Yuanhua WFOE gained effective control over the operations of Yuanhua Information and its subsidiary, Shanghai Yuanhua Clinic Co., Ltd. Yuanhua Information and Shangai Yuanhua Clinic Co., Ltd. provide medical examination related services in China.

In April 2013, Mr. Jinfeng Pan and Mr. Rui Ma established Beijing Jiandatong, with a 80% and 20% equity interest, respectively. In December 2013, Mr. Jinfeng Pan transferred the 80% equity interest in Beijing Jiandatong to Mr. Haiqing Hu. In December 2013, Beijing iKang entered into a series of contractual arrangements with Beijing Jiandatong and Mr. Haiqing Hu through which Beijing iKang gained effective control over the operation of Beijing Jiandatong.

Our company, iKang Healthcare Group, Inc. (formerly known as China iKang Healthcare, Inc.), was incorporated in connection with this offering in May 2011 as a limited liability company in the Cayman Islands. In March 2014, iKang Guobin became the wholly owned subsidiary of our company through a share exchange through which we acquired all the issued and outstanding shares of iKang Guobin, and issued shares to the shareholders of iKang Guobin.

 

 

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The following diagram illustrates our corporate structure immediately prior to this offering.

 

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(1) Shanghai iKang Guobin Holding Co., Ltd., or iKang Holding, is our consolidated affiliated entity established in China, and each of Mr. Ligang Zhang and Mr. Boquan He holds 50% of the equity interest in iKang Holding. Mr. Ligang Zhang and Mr. Boquan He are directors of our company.
(2) Hangzhou iKang Guobin Clinic Co., Ltd., or iKang Hangzhou Xixi, is our consolidated affiliated entity established in China, and iKang Holding and Yalong Daoyi hold 80% and 20% of the equity interest in iKang Hangzhou Xixi, respectively.
(3) Shanghai Yuanhua Information Technology Co., Ltd., or Yuanhua Information, is our consolidated affiliated entity established in China, and Mr. Haiqing Hu and Mr. Lei Zhao hold 80% and 20% of the equity interest in Yuanhua Information, respectively.
(4) Jiandatong Health Technology (Beijing) Co., Ltd., or Beijing Jiandatong, is our consolidated affiliated entity established in China, and Mr. Haiqing Hu and Mr. Rui Ma hold 80% and 20% of the equity interest in Beijing Jiandatong, respectively.
(5) Shanghai Wenzhong Clinic Co., Ltd.’s two subsidiaries, Shanghai Wen-chao Manage Co., Ltd. and Shanghai Guoda Wenzhong Medical Co., Ltd., are in the process of being liquidated.

We currently conduct our operations in China through a series of contractual arrangements entered into (i) among Beijing iKang, iKang Holding and iKang Holding’s shareholders, (ii) among Zhejiang iKang, iKang Hangzhou Xixi and iKang Hangzhou Xixi’s shareholders, (iii) among Yuanhua WFOE, Yuanhua Information and Yuanhua Information’s shareholders and (iv) among Beijing iKang, Beijing Jiandatong and Mr. Haiqing Hu, one of Beijing Jiandatong’s shareholders, including an exclusive business cooperation agreement, share pledge agreement, exclusive call option agreement and powers of attorney, through which Beijing iKang, Zhejiang iKang and Yuanhua WFOE exercise effective control over the operations of iKang Holding, iKang Hangzhou Xixi, Yuanhua Information, Beijing Jiandatong and their subsidiaries, and receive the economic benefits generated from shareholders’ equity interests in these entities. See “Our History and Corporate Structure — Our Corporate Structure.”

As a result of these contractual arrangements and various operational agreements, we are considered the primary beneficiary of iKang Holding, iKang Hangzhou Xixi, Yuanhua Information, Beijing Jiandatong and their subsidiaries, and accordingly, we consolidate the results of operations of iKang Holding, iKang Hangzhou Xixi, Yuanhua Information, Beijing Jiandatong and their subsidiaries in our financial statements. In the opinion of our PRC legal counsel, King & Wood Mallesons Lawyers, the ownership structure and the contractual arrangements among these entities are not in violation of current PRC laws and regulations and each contract under the contractual arrangements is valid, binding and enforceable under current PRC laws. However, our PRC legal counsel has also advised us that there are substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations; accordingly, PRC regulatory authorities may ultimately take a view that is contrary to the opinion of King & Wood Mallesons Lawyers. See “Risk Factors — Risks Related to Our Corporate Structure.”

Corporate Information

Our principal executive offices are located at B-6F Shimao Tower, 92A Jianguo Road, Chaoyang District, Beijing 100022, People’s Republic of China. Our telephone number at this address is +(8610) 5320-6688. Our registered office in the Cayman Islands is located at the offices of Codan Trust Company (Cayman) Limited, Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman KY1-1111, Cayman Islands. Our agent for service of process in the United States is Law Debenture Corporate Services Inc., located at 400 Madison Avenue, 4th Floor, New York, New York 10017.

Investors should contact us for any inquiries through the address and telephone number of our principal executive offices. Our website is http://www.iKang.com. The information contained on our website does not constitute a part of this prospectus.

Our Dual-class Shareholding Structure

Following this offering, we will have two classes of authorized ordinary shares, Class A common shares and Class C common shares. The rights of the holders of Class A and Class C common shares are identical, except

 

 

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with respect to voting and conversion rights. Each Class A common share will be entitled to one vote per share. Each Class C common share will be entitled to 15 votes per share and is convertible at any time into one Class A common share. Mr. Ligang Zhang will beneficially own all of our Class C common shares. Upon the completion of this offering, Mr. Ligang Zhang will own an amount of Class C common shares, which taken together with the Class A common shares beneficially owned by Mr. Ligang Zhang, shall allow him to control the exercise of 36% of our voting power. Upon an exercise of the underwriters’ over-allotment option, Class A common shares held by an affiliate of Mr. Ligang Zhang shall be redesignated to Class C common shares such that after such exercise, the amount of Class C common shares and Class A common shares beneficially owned by Mr. Ligang Zhang, will continue to allow him to control the exercise of 36% of our voting power. Assuming the underwriters have not exercised their over-allotment option to purchase additional ADSs, upon the completion of this offering, Mr. Ligang Zhang will beneficially own Class C common shares; assuming full exercise, Mr. Ligang Zhang will beneficially own              Class C common shares.

 

 

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THE OFFERING

 

Total ADSs offered by us

             ADSs

 

Price per ADS

We currently estimate that the initial public offering price will be between US$             and US$             per ADS.

 

Over-allotment option

We have granted to the underwriters an option, which is exercisable within 30 days from the date of this prospectus, to purchase up to an additional              ADSs.

 

The ADSs

Each ADS represents              Class A common shares, par value US$0.01 per share.

 

  The depositary will hold the Class A common shares underlying your ADSs and you will have rights as provided in the deposit agreement.

 

  We do not expect to pay dividends in the foreseeable future. If, however, we declare dividends on our Class A common shares, the depositary will pay you the cash dividends and other distributions it receives on our Class A common shares, after deducting its fees and expenses in accordance with the terms set forth in the deposit agreement.

 

  You may surrender your ADSs to the depositary to be cancelled in exchange for Class A common shares. The depositary will charge you fees for any cancellation.

 

  We may amend or terminate the deposit agreement without your consent. If you continue to hold your ADSs, you agree to be bound by the deposit agreement as amended.

 

  To better understand the terms of the ADSs, you should carefully read the “Description of American Depositary Shares” section of this prospectus. You should also read the deposit agreement, which is filed as an exhibit to the registration statement that includes this prospectus.

 

ADSs outstanding immediately after this offering

             ADSs (or              ADSs if the underwriters exercise the option to purchase additional ADSs in full).

 

Common shares

Our common shares consist of Class A and Class C common shares. Holders of Class A common shares and Class C common shares have the same rights except for voting and conversion rights. Each Class A common share is entitled to one vote per share, and each Class C common share is entitled to 15 votes per share and is convertible at any time into one Class A common share. Class A common shares are not convertible into Class C common shares under any circumstances.

 

 

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  For more information on our common shares, you should refer to the “Description of Share Capital” section of this prospectus.

 

Common shares outstanding immediately after this offering (including common shares represented by ADSs)

             Class A common shares (or              Class A common shares if the underwriters exercise the option to purchase additional ADSs in full).              Class C common shares (or              Class C common shares if the underwriters exercise the option to purchase additional ADSs in full).

 

Use of proceeds

We expect that we will receive net proceeds of approximately US$              million from this offering (after deducting underwriting discounts, commissions and estimated offering expenses payable by us). We anticipate using the net proceeds we receive from this offering to finance potential strategic acquisitions and construction of new medical centers in China, finance potential strategic acquisitions and construction of dental clinics in China, upgrade our information technology systems and fund working capital as well as for other general corporate purposes. See “Use of Proceeds” for more information.

 

Listing

We have applied to have the ADSs listed on the NASDAQ Global Select Market, or the Nasdaq.

 

Proposed Nasdaq symbol

KANG

 

Depositary

 

Lock-up

We, all of our directors, executive officers, existing shareholders and optionholders have agreed with the underwriters for a period of 180 days after the date of this prospectus not to offer, pledge, sell, contract to sell, sell any option or contract to purchase any option or contract to sell, grant any option, right or warrant for the sale of, or otherwise dispose of or transfer, any of our ADSs or Class A common shares or any securities convertible into or exchangeable or exercisable for the ADSs or Class A common shares. See “Underwriting” for more information.

 

Reserved ADSs

At our request, the underwriters have reserved for sale, at the initial public offering price, up to an aggregate of             % of the ADSs offered by this prospectus, to our directors, officers, employees, business associates and related persons through a directed share program.

 

Timing and settlement for ADSs

The ADSs are expected to be delivered against payment on or about             , 2014. They will be deposited with a custodian for, and registered in the name of a nominee of, The Depository Trust

 

 

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Company, or DTC, in New York, New York. In general, beneficial interests in the ADSs will be shown on, and transfers of these beneficial interests will be effected through, records maintained by DTC and its direct and indirect participants.

 

Risk factors

See “Risk Factors” and other information included in this prospectus for a discussion of risks you should carefully consider before investing in the ADSs.

The number of Class A common shares that will be outstanding immediately after this offering:

 

   

is based upon              Class A common shares outstanding as of the date of this prospectus, assuming the conversion of              outstanding Class B common shares and preferred shares into an aggregate of              Class A common shares on a one-for-one basis immediately upon the completion of this offering;

 

   

assumes that the underwriters do not exercise their option to purchase additional ADSs;

 

   

excludes              Class A common shares issuable upon the exercise of stock options issued under our Share Incentive Plans that are outstanding as of the date of this prospectus, at a weighted average exercise price of US$             per share; and

 

   

excludes              Class A common shares reserved for future issuances under our Share Incentive Plans.

 

 

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SUMMARY CONSOLIDATED FINANCIAL DATA

The following summary consolidated financial data for the periods and as of the dates indicated are qualified in their entirety by reference to, and should be read in conjunction with, our consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” both of which are included elsewhere in this prospectus.

In March 2014, iKang Guobin Healthcare Group, Inc., or iKang Guobin, became the wholly owned subsidiary of our company through a share exchange through which we acquired all the issued and outstanding shares of iKang Guobin, and issued common and preferred shares to the shareholders of iKang Guobin. See “Our History and Corporate Structure.”

The summary consolidated statements of operations data and summary consolidated cash flows data presented below for the years ended March 31, 2011, 2012 and 2013 and the summary consolidated balance sheet data as of March 31, 2012 and 2013 have been derived from the audited consolidated financial statements of iKang Guobin included elsewhere in this prospectus. The audited consolidated financial statements of iKang Guobin are prepared and presented in accordance with accounting principles generally accepted in the United States, or U.S. GAAP, and have been audited by Deloitte Touche Tohmatsu Certified Public Accountants LLP, an independent registered public accounting firm. The summary consolidated statements of operations data and summary consolidated statements of cash flow data presented below for the nine months ended December 31, 2012 and 2013 and the summary consolidated balance sheet data as of December 31, 2013 have been derived from the unaudited condensed consolidated financial statements of iKang Guobin included elsewhere in this prospectus. The summary consolidated statements of operations data and summary consolidated cash flows data for the years ended March 31, 2011, 2012 and 2013 and the nine months ended December 31, 2013 and the summary consolidated balance sheet data as of March 31, 2012 and 2013 and December 31, 2013 of our company, iKang Healthcare Group, Inc., are not presented below because our company had no operations in these periods.

Our historical results are not necessarily indicative of our results to be expected for any future period.

 

 

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Summary Consolidated Statement of Operations Data:

 

    For the Year Ended March 31,     For the Nine Months Ended
December 31,
 
    2011     2012         2013         2012     2013  
    US$     US$     US$     US$     US$  
    (in thousands, except per share data)  

Net revenues

    68,231        93,713        133,871        115,511        172,762   

Cost of revenues

    39,795        49,506        71,079        56,366        82,735   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    28,436        44,207        62,792        59,145        90,027   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

         

Selling and marketing

    9,970        14,005        18,486        13,186        23,046   

General and administrative

    11,172        14,756        23,447        16,495        25,015   

Research and development

    733        748        1,270        970        1,295   

Impairment of goodwill

    70        —          —          —          —     

Write-off of leasehold improvement

    486        309        —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    22,431        29,818        43,203        30,651        49,356   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

    6,005        14,389        19,589        28,494        40,671   

Interest expense

    —          (159     (1,106     (749     (1,038

Gain from forward contracts

    —          —          —          —          230   

Interest Income

    62        101        100        69        54   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

    6,067        14,331        18,583        27,814        39,917   

Income tax expenses

    1,952        3,939        6,134        8,075        12,021   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    4,115        10,392        12,449        19,739        27,896   

Less: Net income attributable to non-controlling interest

    541        690        338        504        633   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to iKang Guobin Healthcare Group, Inc.

    3,574        9,702        12,111        19,235        27,263   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Deemed dividend to preferred shareholders

    —          2,312        84,306        5,110        20,436   

Undistributed earnings allocated to preferred shareholders

    2,770        2,770        2,818        2,087        5,291   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common and preferred shareholders of iKang Guobin Healthcare Group, Inc.

    804        4,620        (75,013     12,038        1,536   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share attributable to common shareholders of iKang Guobin Healthcare Group, Inc.

         

Basic

    0.04        0.22        (11.22 )       0.56        0.06   

Diluted

    0.04        0.21        (11.22     0.54        0.06   

Pro forma net income per common share

         

Basic

    0.17        0.45        0.56        0.89        1.05   

Diluted

    0.17        0.45        0.55        0.88        1.04   

Summary Non-GAAP Financial Data:

         

Adjusted EBITDA(1)

    11,849        21,199        29,572        34,023        47,930   

 

(1) See “—Non-GAAP Financial Measure.”

 

 

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Summary Consolidated Balance Sheet Data:

 

     As of March 31,     As of December 31,  
     2011     2012     2013     2013     2013
(unaudited
pro forma)
 
     US$     US$     US$     US$     US$  
    

(in thousands)

 

Total current assets

     31,887        37,299        104,478        152,311        152,311   

Total assets

     69,244        87,316        165,361        269,829        269,829   

Total current liabilities

     33,041        42,095        73,924        118,092        118,092   

Total liabilities

     33,468        54,056        74,548        123,136        123,136   

Convertible redeemable preferred shares

     82,452        84,764        213,978        264,517        —     

Total iKang Guobin Healthcare Group, Inc. Shareholders’ equity (deficit)

     (48,245     (52,212     (124,195     (119,596     114,921   

Non-controlling interests

     1,569        708        1,030        1,772        1,772   

Total liabilities, mezzanine equity and shareholders’ equity (deficit)

     69,244        87,316        165,361        269,829        269,829   

 

(a) Unaudited Pro forma balance sheet information as of December 31, 2013 assumes the automatic conversion of all of the outstanding convertible redeemable preferred shares into Class A common shares at the original conversion ratio, as if the conversion had occurred as of March 31, 2013.

Selected Consolidated Statements of Cash Flows Data:

 

     For the Year Ended March 31,     For the Nine Months  Ended
December 31,
 
     2011     2012     2013     2012     2013  
     US$     US$     US$     US$     US$  
    

(in thousands)

 

Net cash provided by operating activities

     10,794        14,005        16,314        26,436        48,326   

Net cash used in investing activities

     (5,298     (15,706     (16,058     (8,681     (77,860

Net cash (used in)/provided by financing activities

     (277     (1,161     50,824        6,014        27,572   

Effect of exchange rate changes

     472        595        199        566        788   

Net (decrease) increase in cash and cash equivalents

     5,691        (2,267     51,279        24,335        (1,174)   

Cash and cash equivalents at the beginning of year (period)

     8,451        14,142        11,875        11,875        63,154   

Cash and cash equivalents at the end of year (period)

     14,142        11,875        63,154        36,210        61,980   

Non-GAAP Financial Measure

To supplement our consolidated financial statements which are presented in accordance with U.S. GAAP, we also use Adjusted EBITDA as an additional non-GAAP financial measure. We present this non-GAAP financial measure because it is used by our management to evaluate our operating performance. We also believe that this non-GAAP financial measure provides useful information to investors and others in understanding and evaluating our consolidated results of operations in the same manner as our management and in comparing financial results across accounting periods and to those of our peer companies.

Adjusted EBITDA, as we present it, represents (loss) income from operations, adjusted for depreciation and amortization, impairment of goodwill, impairment of acquired intangible assets, impairment of leasehold improvement, and share-based compensation expense.

The use of Adjusted EBITDA has certain limitations because it does not reflect all items of income and expenses that affect our operations. Items excluded from Adjusted EBITDA are significant components in

 

 

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understanding and assessing our operating and financial performance. Depreciation and amortization, as well as impairment of goodwill impairment of leasehold improvement and share-based compensation expenses, have been and may continue to be incurred in our ordinary course of business and are not reflected in the presentation of Adjusted EBITDA. Each of these items should also be considered in the overall evaluation of our results. Additionally, Adjusted EBITDA does not consider changes in working capital, capital expenditures and other investing activities and should not be considered as a measure of our liquidity. The term Adjusted EBITDA is not defined under U.S. GAAP, and Adjusted EBITDA is not a measure of net income, operating income, operating performance or liquidity presented in accordance with U.S. GAAP.

We mitigate these limitations by reconciling the non-GAAP financial measure to the most comparable U.S. GAAP performance measure, all of which should be considered when evaluating our performance. The following table reconciles our Adjusted EBITDA in the periods/years presented to the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP, which is net loss:

 

     For the Year Ended
March 31,
    For the Nine
Months Ended
December 31,
 
     2011     2012     2013     2012     2013  
     US$     US$     US$     US$     US$  
     (in thousands, except percentages)  

Income from operations

     6,005        14,389        19,589        28,494        40,671   

Add:

          

Depreciation and amortization

     5,199        6,285        7,710        5,529        7,259   

Impairment of goodwill

     70        —          —          —          —     

Impairment of leasehold improvement

     486        309        —          —          —     

Share-based compensation

     89        216        2,273        —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

     11,849        21,199        29,572        34,023        47,930   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of net revenues

     17.4     22.6     22.1     29.5     27.7

In light of the foregoing limitations for this non-GAAP financial measure, when assessing our operating and financial performance, you should not consider Adjusted EBITDA in isolation or as a substitute for our net loss, operating loss or any other operating or financial performance measure that is calculated in accordance with U.S. GAAP. In addition, because this non-GAAP measure may not be calculated in the same manner by all companies, it may not be comparable to other similar titled measures used by other companies.

 

 

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RISK FACTORS

Investing in the ADSs involves a high degree of risk. You should carefully consider the risks described below with all of the other information included in this prospectus before deciding to invest in the ADSs. If any of the following risks actually occur, they may materially harm our business, financial condition, results of operations and prospects. In this event, the market price of the ADSs could decline, and you could lose some or all of your investment.

Risks Related to Our Business

We rely on corporate customers for a significant portion of our net revenues. A reduction in demand from these corporate accounts could materially and adversely affect our business, financial condition, results of operations and prospects.

We derive a significant portion of our net revenues from our services to corporate accounts, which accounted for 80.3%, 84.4%, 83.2% and 79.2% of our net revenues in fiscal 2010, 2011, 2012 and for the nine months ended December 31, 2013, respectively. Revenues from our top ten corporate customers accounted for 14%, 15%, 19% and 18% of our net revenues in fiscal 2010, 2011, 2012 and for the nine months ended December 31, 2013, respectively. Our dependence on these corporate customers increases their bargaining power and the need for us to maintain good relationships with them. If any corporate customer ceases to use our services for any reason or reduces the coverage or reimbursement levels for our services, employees covered under such corporate accounts may opt for or be forced to use other service providers. Our dependence on these corporate accounts also exposes us to risks associated with the internal management, financial condition and creditworthiness of our corporate customers. To the extent that these corporate customers significantly reduce their demand for our services, switch to other preventive healthcare services providers including our competitors, or are unable to pay us in a timely manner, or at all, due to the deterioration of their financial position or other reasons, our business, financial condition, results of operations and prospects would be materially and adversely affected. In addition, we may have to offer volume-based discounts or more favorable credit terms to corporate customers. Any consolidation, restructuring, reorganization or other ownership change in these corporate customers may also have a material adverse effect on our business, financial condition, results of operations and prospects.

We generally enter into corporate service agreements with our corporate customers for a term of one year. We may not be able to renew such agreements on terms that are favorable to us, or at all. In addition, one or more of these major corporate customers may breach their agreements or fail to comply with their obligations thereunder. As a result of the foregoing, our business, financial condition, results of operations and prospects may be materially and adversely affected.

If we fail to manage our growth and our growth strategies effectively, our business, financial condition, results of operations and prospects may suffer.

We have experienced rapid revenue growth since the commencement of our operations. Our net revenues grew by 37.3% from US$68.2 million in fiscal 2010 to US$93.7 million in fiscal 2011 and by 42.9% to US$133.9 million in fiscal 2012. Our net revenues grew by 49.6% from US$115.5 million for the nine months ended December 31, 2012 to US$172.8 million for the nine months ended December 31, 2013. The number of our corporate customers increased approximately, in each case, from 5,200 to 7,100 and 11,200, and the number of our individual customers increased approximately, in each case, from 131,000 to 138,000 and 206,000, respectively, from fiscal 2010, to fiscal 2011 and fiscal 2012. The number of our corporate customers and individual customers approximately increased to 16,900 and 225,000 for the nine months ended December 31, 2013 from 10,100 and 161,000 for the nine months ended December 31, 2012, respectively. While we expect our business to grow, we may not be able to maintain our historical growth rates in future periods. Revenue growth

 

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may slow or revenues may decline for any number of reasons, including our inability to attract and retain our corporate customers, decreased customer spending, increased competition, slowing growth of the overall preventive healthcare services market, the emergence of alternative business models, changes in government policies or general economic conditions. As the size of our customer base continues to increase, the growth rate of our customer base may decline over time. We may also lose customers for other reasons, such as failure to deliver satisfactory medical examination services. If our growth rates decline, investors’ perception of our business and business prospects may be adversely affected.

We intend to further strengthen our leading position in the private healthcare services market in China and achieve future growth. We plan to achieve our goal by implementing strategies such as expanding the breadth and depth of our service platform, expanding our nationwide network coverage, including through selected acquisitions and cooperative relationships with various third party service providers, and further growing our customer base. There is no assurance that our growth strategies will be successful. In addition, to manage and support our growth, we must improve our existing operational and administrative systems as well as our financial and management controls. Our continued success also depends on our ability to recruit, train and retain additional qualified management personnel as well as other administrative and sales and marketing personnel, particularly as we expand into new markets. To accommodate our growth, we anticipate that we will need to implement a variety of new and upgraded operational and financial systems, procedures and controls, including the improvement of our accounting and other internal management systems. We also need to continue to manage our relationships with our partners, suppliers and customers. All of these endeavors will require substantial management attention and efforts and require significant additional expenditures. We cannot assure you that we will be able to manage any future growth effectively and efficiently, and any failure to do so may materially and adversely affect our ability to capitalize on new business opportunities, which in turn may have a material adverse effect on our business, financial condition, results of operations and prospects.

We may not realize the anticipated benefits of our past and potential future investments or acquisitions or be able to recruit or integrate any acquired employees, businesses or products, which in turn may negatively affect their performance and respective contributions to our results of operations.

We have grown our business largely through construction of new centers or acquisitions of existing medical centers, and we will continue to construct new centers at strategic locations and target existing medical centers for our strategic acquisitions. Any existing and future investments in new centers and acquisitions may expose us to potential risks, including, among other things:

 

   

unidentified issues not discovered in our due diligence process, such as hidden liabilities and legal contingencies;

 

   

distraction of management’s attention from normal operations during the acquisition and integration process;

 

   

diversion of resources from our existing businesses;

 

   

difficulties in recruiting employees for newly constructed centers or retaining key employees of the acquired business;

 

   

failure to realize synergies expected from acquisitions or business partnerships;

 

   

unexpected delays in completing any such constructions or acquisitions;

 

   

the availability, terms and costs of any financing required to fund constructions or acquisitions or complete expansion plans;

 

   

the costs of and difficulties in integrating acquired businesses, managing a larger and growing business and operating in new markets and geographic regions; and

 

   

acquired business’ failure to perform as expected and resulting impairment costs.

 

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We may also fail to identify or secure suitable investment or acquisition opportunities, or our competitors may capitalize on such opportunities before we do. Moreover, identifying such opportunities demands substantial management time and resources, and negotiating and financing such investments or acquisitions involves significant costs and uncertainties. If we fail to successfully source, execute and integrate investments or acquisitions, our overall growth could be impaired, and our business, financial condition, results of operations and prospects could be materially and adversely affected. In addition, we may incur losses at the beginning of a new center’s operations when the utilization rate is relatively low due to smaller number of visits while costs and operating expenses are relatively fixed in nature.

Our expansion into the high-end preventive healthcare services market, including the significant capital expenditure expenses involved, may present increased risks.

We plan to expand our service offerings to include high-end preventive healthcare services where we have little or no operating experience. Under our newly established high-end brand, iKang Evergreen, our medicial centers will be located at prime sites at the business districts in the first-tier and second-tier cities of China and will provide to our customers a more spacious and comfortable environment. At such high-end medicial centers, we plan to purchase advanced medical equipment to offer screening services including MRI scans, multi-slice CT screening and various cancer tests and genetic marker evaluations. We also plan to arrange for international experts from world-renowned institutions and teaching hospitals to pay regular visits to our iKang Evergreen centers and provide second opinions and U.S. doctor referral services.

Therefore, we expect to incur significant costs and expenses such as the rental and purchase amount of the medical equipment and personnel cost before such high-end medicial centers begin to generate revenue. In addition, the high-end preventive healthcare services market has different competitive landscape, consumer preference and discretionary spending patterns from our existing market. Consumers in this market may not be familiar with our brand and we may need to build brand awareness in this market through greater investments in advertising and promotional activities than we originally planned. Sales at such high-end medicial centers may take longer than expected to ramp up and reach expected sales and profit levels, thereby affecting our overall profitability.

We could be liable and suffer reputational harm if a third-party service provider provides inferior service or harms a customer, which may have a material adverse effect on our business, financial condition, results of operations and prospects.

Our nationwide network is strengthened by approximately 300 third-party service providers who provide services to our customers under cooperative arrangements with us. We require and expect these third-party service providers to possess the licenses and qualifications that are required for their operations and to adhere to certain performance standards both in terms of customer service and the quality of the medical care that they provide. We generally do not have control over the quality of service or medical care that these third-parties provide. They may not at all times possess the permits or qualifications required by laws and regulations or may fail to meet other regulatory requirements for their operations. In addition, they may engage in conduct which our customers find unacceptable, including providing poor service, mishandling sensitive personal healthcare information and committing medical malpractice. We could be exposed to reputational harm and possible liability as a result of our having serviced a customer through a third-party service provider that performs unsatisfactorily, which may result in a materially adverse effect on our business, financial condition, results of operations and prospects.

We operate in a competitive environment and competing facilities and services could harm our business, financial condition, results of operations and prospects.

There are numerous hospitals and private clinics providing medical examination services and, at the high end of the market, many Chinese hospitals have VIP wards that cater to affluent customers. We face significant competition from two main types of competitors: the medical examination departments of major public hospitals and private medical examination companies. The private preventive healthcare market is further segmented into

 

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large franchise companies, regional providers and numerous local independent medical examination centers located in nearly every city in China. We compete primarily on the basis of price, quality of service, convenience, location, brand recognition, reputation and the provision of customized services. We do not have the same level of brand recognition as some of the medical examination centers of large public hospitals, and in some regional markets our brand is not as established and our geographical coverage is not as extensive as that of our private competitors. Furthermore, we lack the equipment necessary for certain highly technical medical tests. Many competing hospitals that are government-owned are exempt from income taxes on their medical income, which provides them with a significant competitive advantage over us. Competing hospitals, clinics or other facilities may commence new operations or expand existing operations, which would increase their competitive position and potentially erode our business, financial condition, results of operations and prospects.

Our business depends significantly on the strength of our brand and reputation. Failure to develop, maintain and enhance our brand and reputation may materially and adversely affect the level of market recognition of, and trust in, our services.

Our brand and reputation are critical to our success in China’s rapidly expanding healthcare management market. We believe that our “iKang” brand, the Chinese characters of which mean “love” and “health”, is increasingly recognized among health-conscious consumers, especially in Beijing, Shanghai and Guangzhou, for our service quality, online and telephonic accessibility, comfortable environment and reliable service. Our strong brand has helped us to establish our company as a leading, technologically advanced, health management company in China. Many factors, some of which are beyond our control, are important to maintaining and enhancing our brand and may negatively impact our brand and reputation if not properly managed, such as:

 

   

our ability to maintain a convenient, standardized and reliable customer experience as customer preferences evolve and as we expand our service categories and develop new business lines;

 

   

our ability to increase brand awareness among existing and potential customers through various means of marketing and promotional activities;

 

   

our ability to adopt new technologies or adapt our websites and systems to user requirements or emerging industry standards in order to maintain our customer experience; and

 

   

our ability to effectively control the quality of our third-party service providers, and to monitor the service performance of such third-party service providers as we continue to expand our nationwide network.

Our brand and reputation could be harmed if, for example, our services fail to meet the expectation of corporate customers and their employees or clients. Our brand promotion efforts may be expensive and may fail to effectively promote our brand or generate additional sales. We may also face challenges from others seeking to profit from or defame our brand. For example, we have pursued litigation against the owner of several similar “copycat” domain names who defamed our services on the Internet. In addition, any negative review or comment about our company or services published on social network such as Weibo or other public online forum may harm our brand and reputation. Our failure to develop, maintain and enhance our brand and reputation may materially and adversely affect the level of market recognition of, and trust in, our services, which will result in decreased sales and potential loss of customers leading to a material adverse effect on our results of operations and cash flows.

If we fail to properly manage the employment of our doctors and nurses, we may be subject to penalties including fines, loss of licenses, or an order to cease practice against our medical centers, which could materially and adversely affect our business.

The practicing activities of doctors and nurses are strictly regulated under the PRC laws and regulations. Doctors and nurses who practice at medical institutions must hold practicing licenses and may only practice within the scope and at the specific medical institutions for which their practicing licenses are registered.

 

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In practice, it usually takes four to nine weeks for doctors and nurses to transfer their practicing licenses from one medical institution to another or add another medical institution to their permitted practicing institutions. Some of our recently hired doctors have submitted applications to transfer their practicing licenses from their previous employers to our medical centers but have not finished the process. We cannot assure you that these doctors will complete the transfer of their practicing licenses or the government procedures timely, or at all. Our failure to properly manage the employment of our doctors and nurses may subject us to administrative penalties including fines, loss of licenses, or, in the worst case scenario, an order to cease practice against our medical centers, which could materially and adversely affect our business.

Our failure to make sufficient statutory social welfare payments for our employees could materially and adversely affect our business, financial condition, results of operations and prospects.

PRC laws and regulations require us to pay several statutory social welfare benefits for our employees, including medical care insurance, occupational injury insurance, unemployment insurance, maternity insurance, pension benefits and housing fund contributions. We have not paid in full certain required insurance premiums and contribution for our employees in the past. Currently, in several medical centers, we may not be in full compliance with relevant requirements. Some of our subsidiaries have received requests from local social insurance regulatory authorities to make payments for insufficient social insurance contributions for some of their employees and we have made such payments in full upon such requests. The amount of outstanding payments relating to social insurance was approximately US$2.76 million as of December 31, 2013. While we believe we have made adequate provision in our audited consolidated financial statements for any outstanding amounts that are not paid or withheld, our failure to make payments may be in violation of the applicable PRC laws and regulations and we may be subject to fines and penalties. According to the applicable PRC laws and regulations, employers failing to make any of these social welfare benefit payments may be ordered by the government to rectify the noncompliance and make the required payments, plus a late fee charge of up to 0.2% or 0.05%, as the case may be, of the amount overdue per day from the original due date, by a stipulated deadline after they receive written notice from the authorities. If the payment is not made by the stipulated deadline after the employer receives written notice from the authorities in the case of any of the insurance and pension benefit premia described above, the employer may be assessed by the relevant government authority for fines of up to three times the amount of any underreported obligation of the employer. An application may be made to the relevant government authority for deduction of the overdue amount from the employer’s bank account or to a local court for compulsory enforcement of any of these payment obligations and an employee is entitled to compensation if the employer fails to make payments due for social welfare benefits. Late charges, penalties or legal or administrative proceedings to which we may be subject could materially and adversely affect our reputation, financial condition, results of operations and prospects.

We recorded goodwill impairment charges to earnings and may need to record impairment in the future, which would materially and adversely affect our business, financial condition, results of operations and prospects.

As part of our business growth strategy, we have acquired and will in the future acquire or invest in medical centers from third parties. We record goodwill on our balance sheet in connection with such acquisitions and investments. U.S. GAAP requires us to review our goodwill for impairment annually or changes in circumstances indicate that the carrying value may not be recoverable, including a slowdown in the health management industry. If the carrying value of our goodwill is determined to be impaired, U.S. GAAP requires us to write down the carrying value or to record charges to earnings in our financial statements during the period in which our goodwill is determined to be impaired, which would materially and adversely affect business, financial condition, results of operations and prospects. We recorded impairment of goodwill of US$70,000 in fiscal 2010 and did not record any impairment of goodwill in fiscal 2011, 2012 and for the nine months ended December 31, 2013.

 

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The amount and age of our accounts receivable have increased in recent periods, and our results of operations may be adversely affected by increases in reserves for uncollectible accounts receivable.

The amount of our accounts receivable (net of allowance for doubtful accounts) increased from US$18.4 million as of March 31, 2012 to US$30.2 million as of March 31, 2013, and to US$47.3 million as of December 31, 2013 representing 49.3%, 28.9% and 31.1% of total current assets and 21.1%, 18.3% and 17.5% of total assets as of March 31, 2012 and 2013, and December 31, 2013 respectively. Moreover, accounts receivable (net of allowance for doubtful accounts) aged over six months have increased from US$4.1 million, or 22.4% of total accounts receivable, as of March 31, 2012 to US$9.2 million, or 30.4% of total accounts receivable, as of March 31, 2013, and to US$10.6 million, or 22.5% of total accounts receivable, as of December 31, 2013. We have established a reserve for the portion of such accounts receivable that we estimate will not be collected on a timely basis. The specific reserve is based on historical trends and current relationships with the our customers. Changes in the amount and age of our accounts receivable can result from a number of factors, including rapid growth or changes in our customer base, turnover in personnel, changes in payment policies or practices of customers, or changes in the financial health of the customers. Our reserve for uncollectible receivables has fluctuated in the past and will continue to fluctuate in the future. Changes in rates of collection, even if they are small in absolute terms, could require the company to increase its reserve for uncollectible receivables beyond its current level. If the business viability of certain of our customers deteriorates or our credit policies are ineffective in reducing our exposures to credit risk, additional increases in reserves for uncollectible accounts may be necessary, which could adversely affect our financial results.

We may be subject to potential tax liabilities in connection with our acquisition of medical centers from certain third-party individuals, which could have a material adverse effect on our financial condition and results of operations.

We acquired several medical centers from a few PRC individual shareholders from December 2007. Under the relevant PRC individual income tax laws and regulations, the individual sellers are liable to pay individual income tax at the rate of 20% of the capital gain recognized by these individual sellers from such transactions and we were obligated to withhold individual income tax for such individual sellers. We did not withhold individual income taxes for the individual sellers in an acquisition in 2007. The individual sellers are obligated to pay their respective income taxes under the acquisition agreements. We are not certain whether the individual sellers in such an acquisition have fulfilled their respective income tax obligations in connection with such a transaction. If they failed to meet their income tax obligations, the relevant PRC tax authorities may collect taxes from the sellers and may also impose penalties to us and require us to pay the taxes, penalties and interest. In another six acquisitions we made from 2008 to 2013, we did not withhold individual income taxes for the individual sellers, but entered into agreements that required the individual sellers to pay their respective income taxes or indemnify us against all potential tax liabilities arising out of their violation of the relevant tax obligations. However, we cannot assure you that we will be able to recover all losses, or at all, from such individual sellers. The aggregate amount of income taxes that we would have been required to withhold for the individual sellers in the seven acquisitions from 2007 to 2013 was approximately US$450,000. To the extent the tax authorities require us to pay a substantial amount of income taxes for the individual sellers and penalties arising from our failure to withhold such individual income tax and we are unable to recover all of the losses, our liquidity, financial condition and results of operations could be materially and adversely affected.

Our business is heavily regulated. Failure to comply with applicable regulations and any changes in government policies or regulations could result in penalties, loss of licenses, additional compliance costs or other adverse consequences.

Our business is subject to governmental supervision and regulations by PRC regulatory authorities including the National Health and Family Planning Commission, or NHFPC, the Ministry of Industry and Information Technology (formerly known as the Ministry of Information Industry), or the MIIT, and other government authorities. These government authorities promulgate and enforce laws and regulations that cover many aspects

 

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of our business. See “Regulation” for a discussion of the regulations applicable to us and our business. For example, each of our medical centers is required to obtain, among others, a business license, a medical institution establishment approval, a medical institution practicing license and a radiation-related diagnosis and treatment license. We are in the process of applying for the radiation-related diagnosis and treatment licenses for one of our medical centers, and are undergoing annual inspections by local counterpart of the NHFPC of medical institution practicing licenses and radiation-related diagnosis and treatment licenses for certain of our medical centers. We may not be able to obtain such licenses or pass such annual inspections in a timely manner or at all. In addition, each of our medical centers is required to include in the scope specified in their medical institution practicing licenses the medical examination and the specific medical services they are currently providing. If we fail to obtain or maintain effective such licenses for the forgoing medical centers or any competent PRC regulatory authorities determine that we are operating the relevant businesses in an illegal manner, we may be ordered to shut down the relevant medical centers or cease the relevant services or suffer fines or penalties. Our medical institution practicing licenses may be revoked in severe situations.

We are also obligated under relevant PRC laws and regulations to verify that the suppliers of medical equipment, medicine, reagents and other medical consumables that we use in our operations possess the required licenses and qualifications at all times. We have established certain internal procedures to ensure our suppliers have obtained the relevant licenses and qualifications, but such procedures may not always be effective and sufficient. If PRC regulatory authorities determine that we have violated such requirements and obligations, we may be subject to legal sanctions including monetary fines, confiscation of illegal income and our medical institution practicing licenses may be revoked.

In addition, the PRC government may implement further healthcare and Internet-related legislative reforms. Depending on the priorities determined by the NHFPC, the MIIT and other governmental authorities, the continued development of the healthcare system, the development of the Internet and many other factors, future legislative and regulatory development and reforms may be highly diverse, including stringent infection control policies, introduction of health insurance policies, regulation of reimbursement rates for healthcare services, increased regulation of the distribution of pharmaceuticals, restrictions on online health information and the storage of personal medical information. Any policy changes that, for example, may cause our customers or third-party service providers, in particular those that are government-owned, to reconsider their relationships with us, may have an adverse effect on our business, financial condition, results of operations and prospects.

We have limited insurance coverage and thus any claims beyond our capability to pay in cash may result in our incurring substantial costs and a diversion of resources.

We do not maintain any business interruption or liability insurance, and we maintain only limited property insurance and medical malpractice insurance. Currently, we have property insurance coverage for most of our equipment worth above RMB1 million (US$161,010) and medical malpractice insurance for all the doctors at one medical center with coverage of approximately US$100,000 each year. Insurance companies in China offer limited business insurance products. While business interruption insurance is available to a limited extent in China, we have determined that the risks of disruption, cost of such insurance and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to purchase such insurance.

We are subject to potential professional liability risks in the ordinary course of business including (i) for the actions of our employees and (ii) potentially for the actions of third-party service providers to whom we refer our customers. Because the number and incidence of legal actions alleging malpractice or related legal theories against doctors, hospitals and other healthcare providers in China is significantly lower, and the amount of damages awarded by PRC judicial authorities is also lower, in both cases as compared to those in the United States, we do not maintain any medical malpractice insurance and general liability insurance coverage. However, the threat of such claims is increasing as people become more accustomed to using the court system in China to obtain redress for health-related grievances. We also have limited insurance for our medical equipment.

 

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In the event of (i) a lawsuit or regulatory action against us alleging business liability or malpractice or (ii) damage to or the loss of medical equipment, we may be responsible for any losses and the costs of claims beyond our insurance coverage. In the event of an interruption of our business, we would be fully responsible for any losses and the costs of claims. Paying for such losses or claims could result in substantial expenses and diversion of resources and could materially and adversely affect our business, financial condition and results of operations.

We rely on our major suppliers to provide materials and equipment for our preventive healthcare services.

We rely to a large degree on our major suppliers for materials and equipment for our preventive healthcare services. There can be no assurance that we will be able to maintain our relationships with our major suppliers. If the business relationship between our company and our major suppliers were to deteriorate or if any of those suppliers were to terminate its business relationship with our company, our business and results of operations may be adversely affected. In addition, under certain agreements we have entered into with some of our suppliers of reagent, in exchange for use of certain medical equipment for free or, in order to enjoy price discounts, we agreed to purchase exclusively from such suppliers and the purchase amount needs to reach a minimum level. Such arrangements may limit our ability to access more favorable terms offered by other suppliers.

Expansion of our healthcare services could be affected by the expansion of government-sponsored social medical insurance available to the Chinese population that is not available now.

Most government-sponsored social medical insurance in China does not cover medical examinations. In certain locations where government-sponsored social medical insurance covers medical examinations, we have become a qualified institution under such insurance coverage. Currently, most of our corporate customers pay for medical examinations for their employees, and individual customers pay directly for medical examinations. If government-sponsored social medical insurance is further expanded to cover medical examinations in more geographical locations, and iKang does not become a qualified institution for such coverage, certain of our corporate customers may discontinue or terminate their relationship with us, and certain individual customers may opt to use other medical institutions covered by such medical insurance rather than pay for our services. As a result, the expansion of government-sponsored social medical insurance could materially and adversely affect our business, financial condition and results of operations.

Property leasing costs associated with our healthcare services are a significant part of our cost of revenues and any significant changes in property leasing market could have a material and adverse impact on our business, financial condition and results of operations.

Our ability to achieve profitability is affected by various factors, some of which are beyond our control. We currently lease all of the facilities in which we operate our self-owned medical centers, and the leasing costs associated with our healthcare services have historically accounted for a significant portion of our cost of revenues. In fiscal 2010, 2011, 2012 and for the nine months ended December 31, 2013, the leasing costs comprised 16.6%, 17.3%, 18.2% and 17.9% of our cost of revenues, respectively. Although we expect our leasing costs as a percentage of net revenues to decrease over time, we expect our leasing costs to increase on an absolute basis as we expand the number of medical centers that we operate and as landlords increase rental rates. The leases on our 42 self-owned medical centers have various expiration dates ranging from 2014 to 2025. As these leases approach expiration, we may not be able to renew them on terms favorable to us, or at all. Landlords may also terminate leases prior to the expiration date upon the payment of a penalty which, in our judgment, makes it unlikely for the landlords to terminate these leases early. If we cannot successfully offset our increased leasing cost with an increase in net revenues, our gross margin, financial condition and results of operations could be materially and adversely affected.

 

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Compliance with environmental, health and safety laws and regulations in China can be expensive, and noncompliance with these regulations may result in significant monetary damages, fines and other penalties.

As the operations of our business generate waste water, hazardous substances and other industrial wastes, we must comply with all applicable national and local environmental laws and regulations in China. We are required to undertake environmental impact assessment and occupational diseases hazard assessment procedures and pass certain inspection and approval procedures before commencing our operations. We are also required to register with, or obtain approvals from, relevant environmental protection authorities for various environmental matters such as discharging waste generated by our operations. In addition, each of our medical centers is required to comply with the safety and health laws and regulations in China. For example, each of our medical centers must obtain a radiation safety permit from the relevant local counterpart of the Ministry of Environmental Protection in order to operate any medical equipment that contains radioactive materials or emits radiation. We have not completed certain environmental and occupational disease related assessment or approval procedures for some of our facilities, some of our facilities have not obtained or timely updated the required waste discharge permits and radiation safety permits, and some of our medical centers fail to follow all requirements for disposing medical wastes. We are taking remedial measures necessary to obtain the requisite approvals and permits and follow the requisite requirements. However, we may not be able to obtain such approvals and permits or follow the requisite requirements in a timely manner or at all. If for any reason the relevant government authorities in China determine that we are not in compliance with environmental, health and safety laws and regulations, we may be required to pay fines or damages to third parties or we may be ordered to suspend or cease our operations in the relevant premises. In addition, because the requirements imposed by environmental, health and safety laws and regulations may change and more stringent regulations may be adopted, we may be unable to accurately predict the cost of complying with these laws and regulations, which could be substantial.

Our business exposes us to liability risks that are inherent in the operation of complex medical equipment, which may experience failures or cause injury either because of defects, faulty maintenance or repair, or improper use.

Our business exposes us to liability risks that are inherent in the operation of complex medical equipment, which may experience failures or cause injury either because of defects, faulty maintenance or repair, or improper use. Extended downtime of our medical equipment could result in lost revenues, dissatisfaction on the part of customers and damage to our reputation. Any injury caused by our medical equipment in our medical centers due to equipment defects, improper maintenance or improper operation could subject us to liability claims. Regardless of their merit or eventual outcome, such liability claims could result in significant legal defense costs for us, harm our reputation, and otherwise have a material adverse effect on our business, financial condition and results of operations.

We primarily rely on equipment manufacturers or third-party service providers to maintain and repair the complex medical equipment used in our medical centers. If any of these manufacturers or third-party service providers fails to perform its contractual obligations to provide such services, or refuses to renew these service agreements on terms acceptable to us, or at all, we may not be able to find a suitable alternative service provider or establish our own maintenance and repair team in a timely manner. Similarly, any failure of or significant quality deterioration in such service providers’ services could materially and adversely affect customer experience. We also rely on both equipment manufacturers and our own internal expertise to provide technical training to our staff on the proper operation of such equipment. If such medical technicians are not properly and adequately trained, or if they make errors in the operation of the complex medical equipment even if they are properly trained, they may misuse or ineffectively use the complex medical equipment in our medical centers. Such failure could result in unsatisfactory medical examination results, diagnosis, treatment outcomes, patient injury or possibly death, any of which could materially and adversely affect our business, financial condition, results of operations and prospects.

 

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We may be involved in legal and other disputes from time to time arising out of false positive or false negative checkup results or misdiagnosis and our reputation and results of operations may be harmed.

We may from time to time receive complaints from or be involved in disputes with our customers with regard to false positive or false negative checkup results or misdiagnosis. The occurrence of false positive or false negative checkup results or misdiagnosis is a unique risk of medical examination service industry caused by the uncertainty during the medical examination service process. In addition, with the rapid growth we have experienced in recent years, our operations are under pressure and the checkup result reports provided to our customers may not completely reflect the health condition of our customers which could be caused by various factors such as negligence of the medical personnel, failure of medical equipment, individual customer difference and disease complication. These complaint and disputes may lead to legal or other proceedings and may result in damage to our reputation, substantial costs and diversion of resources and management’s attention from our core business activities.

We depend on information technology systems to operate and manage our business. If our information technology systems fail to adequately perform these functions, or if we experience an interruption in their operation, our business, financial condition, results of operations and prospects could be materially and adversely affected.

The efficient operation of our business depends on our information technology systems. We rely on our information technology systems to, among other things, schedule and manage the provision of services to our customers, effectively manage accounting and financial functions and monitor our internal cost factors. If we experience a reduction in the performance, reliability or availability of our information systems, our operations and ability to produce timely and accurate reports could be adversely impacted. Our information systems and applications require continuous maintenance, upgrading and enhancement to meet operational needs. Moreover, the proposed expansion of facilities and acquisition of new centers requires transitions to or from, and the integration of, various information systems. Upgrades, expansions of capabilities, and other potential system-wide improvements in information systems may require large capital expenditures. If we experience difficulties with the transition to or from information systems or are unable to properly implement, finance, maintain or expand our systems, we could suffer, among other things, from operational disruptions and a reduction in customer satisfaction, which could materially and adversely affect our business, financial condition, results of operations and prospects.

The proper functioning of our website and network infrastructure is essential to our business and any failure to maintain the satisfactory performance, security and integrity of our website and network infrastructure will materially and adversely affect our business, reputation, financial condition and results of operations.

The satisfactory performance, reliability and availability of our website and our network infrastructure are critical to our success as well as our ability to attract and retain customers and maintain adequate customer service levels. Any system interruptions caused by our servers, telecommunications failures, computer viruses, hacking or other attempts to harm our systems may result in the unavailability or slowdown of our website, or the information systems of one of our third-party service providers, and may reduce our ability to schedule appointments and result in customers being unable to access their health records. Furthermore, because our servers are located primarily in Beijing, users outside Beijing may experience bandwidth-related slowdowns for various reasons beyond our control. Our servers may also be vulnerable to computer viruses, physical or electronic break-ins, or other potential disruptions, which could lead to interruptions, delays, loss of data or the inability to accept and fulfill customer orders. We may also experience interruptions caused by reasons beyond our control such as power outages, or efforts to gain unauthorized access to our systems causing loss or corruption of data or malfunctions of software or hardware.

 

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We rely on the Internet infrastructure and fixed line and mobile telecommunication networks in China to provide the data communication capacity necessary for our business. Almost all access to the Internet in China is maintained through state-owned telecommunication operators under the administrative control and regulatory supervision of the MIIT. In the event of any infrastructure disruption or failure or other problems with the Internet infrastructure or the telecommunication networks in China, the quality and stability of our websites and our platform may be affected, which could damage our reputation, diminish the attractiveness of our services and have a material adverse effect on our business, financial condition, results of operations and prospects.

Failure to protect confidential information of our customers and their employees or clients and our online system against security breaches could damage our reputation and brand and substantially harm our business, financial condition and results of operations.

A significant challenge to our online and telephonic health management system is the secure transmission of confidential information over public Internet and telecommunication networks. Currently, we rely on third-party service providers to provide the bandwidth for our online and telephonic health management consulting system and to provide online payment services. Through our online and telephonic system, our customers can schedule and purchase healthcare-related services offered by our own medical facilities and third-party hospitals, and they can view their medical reports online. We hold certain private information about our customers, such as their medical examination and disease screening test results, names, addresses, gender, phone numbers and purchasing records. Customer information is stored on servers owned and maintained by us but located in a third-party Internet data center. Payments for our online sales are made through our own websites and third-party online payment services. Maintaining complete security for the transmission of confidential information when a customer views personal medical information online or buys a prepaid service card from us is essential to maintaining user confidence. We have limited influence over the security measures of the third party service providers that we use and the security of the Internet in general. We may not be able to prevent third parties, such as hackers or criminal organizations, from stealing information provided by our customers to us. Significant capital and other resources may be required to protect against security breaches or to alleviate problems caused by such breaches. Any compromise of our security or third-party service providers’ security could have a material adverse effect on our reputation, business, prospects, financial condition and results of operations. In addition, the methods used by hackers and others engaged in online criminal activities are increasingly sophisticated and constantly evolving. Even if we are successful in adapting to and preventing new security breaches, any perception by the public that online transactions, or the privacy of user information, are becoming increasingly unsafe or vulnerable to attack could inhibit the growth of online businesses generally, which in turn may reduce our customers’ confidence and materially and adversely affect our reputation, business, financial condition, results of operations and prospects.

We could be exposed to risk for our dealing with medical data.

Our self-owned medical centers collect and maintain medical data from medical examination and disease screening test results in order to make such data available to the respective individuals who take such examinations or tests at our medical centers. PRC laws and regulations generally require medical institutions to protect the privacy of their patients or customers and prohibit unauthorized disclosure of personal information. We have taken measures to maintain the confidentiality of our customers’ medical information, including encrypting such information in our information technology system so that it can not be viewed without proper authorization and setting internal rules requiring our employees to maintain the confidentiality of our customers’ medical information. However, these measures may not be always effective in protecting our customers’ medical information. In addition, although we do not make the customers’ medical information available to the public, we use such data on an aggregating basis after redacting personal identity for marketing purpose and to provide to our corporate customers to monitor the collective health conditions of their employees. Although we believe our current usage of customers’ medical information is in compliance with applicable laws and regulations governing the use of such information, any change in such laws and regulations could affect our ability to use medical data

 

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and subject us to liability for the use of such data. Failure to protect customers’ medical information, or any restriction on or liability as a result of, our use of medical data, could have a material adverse effect on our business.

The failure to comply with PRC property laws and relevant regulations regarding certain of our leased premises may materially and adversely affect our business, financial condition, results of operations and prospects.

We lease premises in various cities as our offices and venues to carry out medical examination, disease screening, outpatient services and other health management businesses. These leases may not meet certain land and property-related legal requirements under PRC laws and regulations. For example, certain lessors have not been able to provide us with relevant building ownership certificates or other documents that evidence their legal right to lease our leased properties or fire protection approvals regarding certain of our leased properties. Some leased properties are used by us as offices or medical examination centers while they are under zoning restrictions to be used for educational purposes. In addition, we have not completed the lease registration for some of our premises as required by PRC housing administration authorities. We have not received any notification from PRC government authorities regarding our noncompliance with applicable land and property-related requirements. Except for Shanghai Wenzhong Clinic Co., Ltd., or Shanghai Wenzhong, which was unable to commence its operations as a result of residents’ objection to the use of the location it occupied and entered liquidation proceedings on October 22, 2013, we are not aware of any third parties that have attempted to interfere with our rights to use our leased premises arising from our non-compliance with such requirements. If any challenge from government authorities or third parties arises, we may be subject to fines, our leases may be invalidated and our rights under these leases may be materially and adversely affected. In addition, we may be forced to relocate any affected premises. All of these consequences could materially and adversely affect our business, financial condition, results of operations and prospects.

Our failure to comply with the U.S. Foreign Corrupt Practices Act, or the FCPA, and other anticorruption laws could result in penalties which could harm our reputation and have a material adverse effect on our business, financial condition, results of operations and prospects.

After the completion of this offering, we will be subject to the FCPA which prohibits companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or keeping business and/or other benefits, along with various other anticorruption laws. We are in the process of implementing policies and procedures designed to ensure that we, our employees and other intermediaries comply with the FCPA and other anti-corruption laws to which we are subject. Such policies or procedures may not work effectively or protect us against liability under the FCPA or other laws for actions taken by our employees and other intermediaries with respect to our business or any businesses that we may acquire. As we market and offer our services to increasing numbers of state-owned enterprises and governmental agencies in China, we will have frequent contact with persons who may be considered “foreign officials” under the FCPA, resulting in an elevated risk of potential FCPA violations. Any investigation of a potential violation of the FCPA or other anticorruption laws by the United States or foreign authorities could have an adverse impact on our reputation, and if we are not in compliance with the FCPA and other laws governing the conduct of business with government entities we may be subject to criminal and civil penalties and other remedial measures, which could have an adverse impact on our reputation, business, financial condition, results of operations and prospects.

Our extensive and increasing operations in the PRC may give rise to elevated compliance risks on anti-bribery. Although we have established an internal control system to ensure the compliance of our business operation with PRC anti-bribery laws, and we have requested our employees, agents and third party business partners to comply with applicable anti-bribery laws, these measures may not be always effective, or at all, to prevent the breach of anti-bribery laws. In recent years, commercial bribery has increasingly been identified as a key risk in doing business in the PRC, especially in the pharmaceutical and healthcare sector. If PRC regulatory authorities determine that our marketing or other activity violates the anti-bribery or anti-corruption laws, we may be penalized or ordered to cease such activity, which could have an adverse impact on our business.

 

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We may not be able to develop and successfully market new services, which would materially and adversely affect our business, financial condition, results of operations and prospects.

Our success depends on our ability to anticipate industry trends and identify, develop and market in a timely and cost-effective manner new value-added services that meet customer demand. Examples include additional disease screening offerings and advanced health management services to enable both executives and increasingly health-conscious individuals to manage all aspects of their health. Developing new services in a timely and cost-effective manner can be difficult, particularly because services can change with market preferences. Our understanding of the market and evolving customer preferences may not lead to new services that are commercially successful. We may also experience delays or be unsuccessful in any stage of service development, introduction or implementation. We may not be able to successfully market our new services or our end customers may not be receptive to our new services. Our competitors’ service development capabilities may be more effective than ours, and their new services may reach the market before ours. Our competitors may also be more effective or less expensive than us. The introduction of new or similar services by our competitors may result in price reductions on our services or reduced margins or loss of market share. Our new services may impact our gross margins depending on the level of market acceptance and pricing environment for each service. The success of any of our new services also depends on several other factors, including our ability to:

 

   

optimize our staffing and procurement processes to predict and control costs;

 

   

integrate new service offerings into our medical centers and referral services in a timely manner;

 

   

minimize the time and costs required to obtain required regulatory clearances or approvals;

 

   

anticipate and compete effectively with competitors, including pricing our services competitively; and

 

   

increase end customer awareness and acceptance of our services.

If we are unable to develop new services in a timely manner to meet market demand, or if there is insufficient demand for our new services, our business, financial condition, results of operations and prospects may be materially and adversely affected.

Unauthorized use of our intellectual property by third parties, and the expenses incurred in protecting our intellectual property rights, may materially and adversely affect our business and competitive position.

We regard our trademarks, service marks, domain names, software copyrights, trade secrets and similar intellectual property as critical to our competitiveness and success. We rely on the trademark, copyright and other intellectual property laws and confidentiality agreements with our employees, customers, third-party service providers and others to protect our proprietary rights. As of the date of this prospectus, we have 44 registered trademarks. We own or possess the rights to 56 domain names that we use in connection with the operation of our business and have copyrighted 11 software programs that we developed ourselves for managing our operations. Nevertheless, these afford only limited protection and it can be difficult and expensive to police unauthorized use of intellectual property that we own or license. We have taken, and will continue to take, a variety of actions to combat infringement of our intellectual property. We filed a lawsuit in the Jiangsu Nantong Intermediate Court in 2009 against a third party who infringed our trade name by defaming our services on the Internet. On June 21, 2011, the Jiangsu Higher Court ordered the infringing party to stop its infringing activities and compensate our losses. In addition, in January 2009, we submitted an arbitration claim before the Domain Name Dispute Resolution Center of the China International Economic and Trade Arbitration Center against the owner of the similar copycat domain name that was used in the above-mentioned defamation activities, and such domain name was cancelled by arbitral award on March 24, 2009. However, our legal actions may not always be successful. In 2012, we filed an arbitration proceeding against a third party company who operates a website under the domain name of “www.aikang.com” and use as tradename the same Chinese characters as one of our PRC subsidiaries to provide medical knowledge, introduction of medical institutions and links to websites of medical examination centers. But our claim was dismissed by the arbitral tribunal, and the website “www.aikang.com” is still operated by such third-party company as of the date of this prospectus. Infringement of our intellectual property by third parties, and the expenses incurred in protecting our intellectual property rights, may materially and adversely affect our business.

 

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Intellectual property rights historically have not been enforced in China as vigorously as in the United States, and intellectual property infringement is a serious risk for companies operating in China. Moreover, we have in the past, and may in the future, enforce our intellectual property rights through litigation, which could result in substantial costs, divert the efforts and resources of our management personnel and disrupt our business. The validity and scope of any claims relating to our intellectual property may involve complex legal and factual questions and analyses and, as a result, the outcome may be highly uncertain. In addition, there is no guarantee that we will be able to detect unauthorized use of our intellectual property and stop such use through litigation. Failure to protect our intellectual property rights could have a material adverse effect on our business, financial condition and results of operations as well as severely harm our competitive position.

We may be subject to intellectual property infringement or misappropriation claims by third parties, which may force us to incur substantial legal expenses and, if determined adversely against us or our authors, may materially disrupt our business.

We may be exposed to intellectual property rights infringement or misappropriation claims by third parties when we develop and use our own technology, know-how and brand. We may also be subject to litigation involving claims of trademark infringement or violation of other intellectual property rights of third parties. Defense against any of these or other claims would be both costly and time-consuming, and could significantly divert the efforts and resources of our management and other personnel. An adverse determination in any such litigation or proceedings to which we may become a party could subject us to significant liability to third parties, require us to seek licenses from third parties, pay ongoing royalties, or subject us to injunctions prohibiting the distribution and marketing of the relevant brand or services. To the extent that licenses are not available to us on commercially reasonable terms or at all, we may be required to expend considerable time and resources sourcing alternative technologies, if any, or we may be forced to delay or suspend the sale of the relevant services or the promotion of the relevant brand. We may incur substantial expenses and require significant attention of management in defending against these third-party infringement claims, regardless of their merit. Protracted litigation could also result in our customers or potential customers deferring, reducing or canceling their purchase of our services. In addition, we could face disruptions to our business operations as well as damage to our reputation as a result of such claims, and our business, financial condition, results of operations and prospects could be materially and adversely affected.

Our quarterly revenues and operating results are difficult to predict and could fall below investor expectations, which could cause the trading price of the ADSs to decline.

Our quarterly revenues and operating results have fluctuated in the past and may continue to fluctuate significantly depending upon numerous factors. In particular, we typically have slightly lower revenues during the fourth quarters of each fiscal year primarily due to the public holidays in that period including the New Year and Chinese Lunar New Year holidays. Our relatively stronger performance in the third fiscal quarter has been largely due to the fact that many of our corporate customers arrange for their employees to conduct medical examinations in the third quarter of our fiscal year. Other factors that may affect our financial results include, among others:

 

   

our ability to attract and retain our corporate clients and to expand into and further penetrate new markets;

 

   

changes in pricing policies by us or our competitors;

 

   

the amount of operating costs and capital expenditures relating to expansion of our business, operations and infrastructure;

 

   

the timing and market acceptance of new services introductions by us or our competitors; and

 

   

changes in government policies or regulations, or their enforcement.

As a result, you should not rely on quarter-to-quarter or semi-annual-to-semi-annual comparisons of our results of operations as set forth in this prospectus as indicators of our likely future performance. Our operating

 

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results may be below our expectations or the expectations of public market analysts and investors in one or more future quarters. If that occurs, the price of the ADSs could decline and you could lose part or all of your investment.

If we grant employees share options, restricted shares or other equity incentives in the future, our net income could be adversely affected.

We granted share options to our employees and advisors in 2004, 2005, 2006, 2007, 2010, 2012, 2013 and 2014. We are required to account for share based compensation in accordance with Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 718, Compensation — Stock Compensation, which generally requires a company to recognize, as an expense, the fair value of share options and other equity incentives to employees based on the fair value of equity awards on the date of the grant, with the compensation expense recognized over the period in which the recipient is required to provide service in exchange for the equity award. As of December 31, 2013, there were 1,484,698 options outstanding which entitle their holders to purchase a total of 1,484,698 Class A common shares. As a result, we incurred share-based compensation expense of US$89,000, US$216,000, US$2,273,000 and nil in fiscal 2010, 2011, 2012 and for the nine months ended December 31, 2013, respectively. In February 2014, we granted 429,000 options to our employees and advisers. If we grant more options, restricted shares or other equity incentives, we could incur significant compensation charges and our results of operations could be adversely affected. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies” and Note 18 to our consolidated financial statements for the years ended March 31, 2011, 2012 and 2013 and Note 15 to our unaudited condensed consolidated financial statements for the nine months ended December 31, 2012 and 2013 included in this prospectus for a more detailed presentation of accounting for our share-based compensation plans.

If we fail to maintain an effective system of internal control over financial reporting, we may be unable to accurately report our financial results or prevent fraud, and investor confidence in our company and the market price of our ADSs may be adversely affected.

Prior to this offering, we have been a private company and have had limited accounting personnel and other resources with which to address our internal control over financial reporting. In connection with the preparation and external audit of our consolidated financial statements, we and our independent registered public accounting firm identified a material weakness, certain significant deficiencies and other control deficiencies, each as defined in the U.S. Public Company Accounting Oversight Board Standard AU Section 325, Communications About Control Deficiencies in an Audit of Financial Statements, or AU325, in our internal control over financial reporting as of March 31, 2013. The material weakness identified relates to the lack of sufficient skilled resources with U.S. GAAP knowledge for the purpose of financial reporting and lack of continuing professional training on U.S. GAAP and SEC regulations for accounting personnel. The significant deficiencies identified relate to (i) the lack of effective control over contract management and (ii) the lack of automatic integration between the revenue system and accounting system.

Neither we nor our independent registered public accounting firm has undertaken a comprehensive assessment of our internal control for purposes of identifying and reporting material weaknesses, significant deficiencies and other control deficiencies in our internal control over financial reporting as we and they will be required to do once we become a public company. In light of the number of material weakness, significant deficiencies and other control deficiencies that were identified as a result of the limited procedures performed, we believe it is possible that, had we performed a formal assessment of our internal control over financial reporting or had our independent registered public accounting firm performed an audit of our internal control over financial reporting, additional control deficiencies may have been identified.

We have taken measures and plan to continue to take measures to remedy these weaknesses and deficiencies. For example, we (i) hired a senior executive officer with extensive U.S. GAAP knowledge as our chief financial officer in 2013; (ii) implemented a set of comprehensive contract management rules; and (iii) assigned designated personnel to be responsible for the integration between the revenue system and

 

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accounting system. Also we plan to (i) hire one senior staff member with extensive U.S. GAAP knowledge and (ii) engage external advisors such as our independent registered public accounting firm to provide training on U.S. GAAP and SEC regulations for our accounting personnel. However, the implementation of these measures may not fully address the material weakness, significant deficiencies and other control deficiencies in our internal control over financial reporting, and we cannot conclude that they have been fully remedied. Our failure to correct the material weakness, significant deficiencies and other control deficiencies or our failure to discover and address any other control deficiencies could result in inaccuracies in our financial statements and could also impair our ability to comply with applicable financial reporting requirements and related regulatory filings on a timely basis. As a result, our business, financial condition, results of operations and prospects, as well as the trading price of our ADSs, may be materially and adversely affected. Moreover, ineffective internal control over financial reporting may significantly hinder our ability to prevent fraud.

Upon completion of this offering, we will become subject to the Sarbanes-Oxley Act of 2002, as amended, or Sarbanes-Oxley Act, subject to exemptions we qualify for under the JOBS Act. Section 404 of the Sarbanes-Oxley Act, or Section 404, will require that we include a report from management on the effectiveness of our internal control over financial reporting in our annual report on Form 20-F beginning with our annual report for the fiscal year ending March 31, 2014. In addition, once we cease to be an “emerging growth company” as such term is defined in the JOBS Act, our independent registered public accounting firm attest to and must report on the effectiveness of our internal control over financial reporting. If we fail to remedy the problems identified above, our management and our independent registered public accounting firm may conclude that our internal control over financial reporting is not effective. This conclusion could adversely impact the market price of our ADSs due to a loss of investor confidence in the reliability of our reporting processes. We also expect to incur additional costs and expenses associated with our becoming a public company, including costs to prepare for our first Section 404 compliance testing and additional legal and accounting costs to comply with the requirements of the U.S. securities law that will apply to us as a public company.

We are an “emerging growth company” and may not be subject to requirements that other public companies are subject to, which could harm investor confidence in us and our ADSs.

We are an “emerging growth company” as defined in the Jumpstart Our Business Act of 2012, or the JOBS Act, and, for as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies, including an exemption from the requirement to comply with the auditor attestation requirements of Section 404 and an exemption from the requirement to adopt and comply with new or revised accounting standards at the same time as other public companies. We will remain an emerging growth company until the earliest of (i) the last day of our fiscal year during which we have total annual gross revenues of at least US$1.0 billion; (b) the last day of our fiscal year following the fifth anniversary of the completion of this offering; (c) the date on which we have, during the previous three-year period, issued more than US$1.0 billion in non-convertible debt; or (d) the date on which we are deemed to be a “large accelerated filer” under the Exchange Act, which would occur if the market value of our ADSs that are held by non-affiliates exceeds US$700 million as of the last business day of our most recently completed second fiscal quarter.

The JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we will elect to “opt out” of this provision and, as a result, we will comply with any new or revised accounting standards as required when they are adopted for public companies. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

We cannot predict if investors will find our ADSs less attractive because we may rely on these exemptions. If some investors find our ADSs less attractive as a result, there may be a less active trading market for our ADSs and our ADS price may be more volatile.

 

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We will incur increased costs as a result of being a public company, particularly after we cease to qualify as an “emerging growth company.”

Upon completion of this offering, we will become a public company and expect to incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act, as well as rules subsequently implemented by the SEC, and the Nasdaq, impose various requirements on the corporate governance practices of public companies. As an “emerging growth company” pursuant to the JOBS Act, we may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act, or Section 404, in the assessment of the emerging growth company’s internal control over financial reporting and permission to delay adopting new or revised accounting standards until such time as those standards apply to private companies. However, we will elect to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted for public companies. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

We expect these rules and regulations to increase our legal and financial compliance costs and to make some corporate activities more time-consuming and costly. After we are no longer an “emerging growth company,” we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act and the other rules and regulations of the SEC. For example, as a result of becoming a public company, we will need to increase the number of independent directors and adopt policies regarding internal controls and disclosure controls and procedures. We also expect that operating as a public company will make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. In addition, we will incur additional costs associated with our public company reporting requirements. It may also be more difficult for us to find qualified persons to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate with any degree of certainty the amount of additional costs we may incur or the timing of such costs.

In the past, shareholders of a public company often brought securities class action suits against the company following periods of instability in the market price of that company’s securities. If we were involved in a class action suit, it could divert a significant amount of our management’s attention and other resources from our business and operations, which could harm our results of operations and require us to incur significant expenses to defend the suit. Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on our financial condition and results of operations.

We depend on the continued service of our management team and other key employees, and our business, financial condition and results of operations will suffer greatly if we lose their services.

Our future success depends on the continued service of our key executive officers and other key employees. In particular, we rely on the expertise, experience and leadership ability of Mr. Ligang Zhang, our founder, chairman and chief executive officer. We also rely on a number of key technology officers and staff for the development and operation of our business. In addition, as we expect to focus increasingly on the development of our business, we will need to continue attracting and retaining skilled and experienced medical personnel and sales and marketing staff for our business to maintain our competitiveness.

If one or more of our key personnel are unable or unwilling to continue in their present positions, we may not be able to replace them easily or at all and may incur additional expenses to recruit and train new personnel. Consequently, our business could be severely disrupted, and our business, financial condition and results of

 

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operations could be materially and adversely affected. We do not maintain key-man life insurance for any of our key personnel. In addition, if any of our executive officers or key employees joins a competitor or forms a competing company, we may lose know-how, trade secrets, customers and key professionals and staff. Each of our employees who have access to sensitive and confidential information has also entered into a non-disclosure and confidentiality agreement with us. Although non-compete provisions are generally enforceable under PRC laws, PRC legal practice regarding the enforceability of such provisions is not as well-developed as in countries such as the United States. Thus, if we need to enforce our rights under the non-compete provisions, we cannot assure you that a PRC court would enforce such provisions.

Furthermore, since the demand and competition for talent is intense in our industry, particularly for qualified doctors and medical staff, and the availability of suitable and qualified candidates is limited, we may need to offer higher compensation and other benefits in order to attract and retain key personnel in the future, which could increase our compensation expenses. We previously awarded to certain of our employees stock options, some of which have not yet vested. Such retention awards may cease to be effective to retain our current employees once the options vest. We may need to increase our total compensation costs to attract and retain experienced personnel required to achieve our business objectives and failure to do so could severely disrupt our business and growth. We cannot assure you that we will be able to attract or retain the key personnel that we will need to implement our strategies and achieve our business objectives.

Proceedings instituted by the SEC against five PRC-based accounting firms, including our independent registered public accounting firm, could result in financial statements being determined to not be in compliance with the requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act.

In late 2012, the SEC commenced administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley Act of 2002 against the Chinese affiliates of the “big four” accounting firms, including our auditors, and also against Dahua, the former BDO affiliate in China. The Rule 102(e) proceedings initiated by the SEC relate to these firms’ failure to produce documents, including audit work papers, in response to the request of the SEC pursuant to Section 106 of the Sarbanes-Oxley Act of 2002, as the auditors located in the PRC are not in a position lawfully to produce documents directly to the SEC because of restrictions under PRC law and specific directives issued by the China Securities Regulatory Commission. The issues raised by the proceedings are not specific to our auditors or to us, but affect equally all audit firms based in China and all China-based businesses with securities listed in the United States.

In January 2014, the administrative judge reached an initial decision that the “big four” accounting firms should be barred from practicing before the SEC for a period of six months. However, it is currently impossible to determine the ultimate outcome of this matter as the accounting firms have filed a petition for review of the initial decision and pending that review the effect of the initial decision is suspended. It will, therefore, be for the commissioners of the SEC to make a legally binding order specifying the sanctions if any to be placed on these audit firms. Once such an order was made, the accounting firms would have a right to appeal to the U.S. Federal courts, and the effect of the order might be further suspended pending the outcome of that appeal.

If our independent registered public accounting firm were denied, temporarily, the ability to practice before the SEC and we were unable to timely find another registered public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined to not be in compliance with the requirements of the Exchange Act. Such a determination could ultimately lead to delisting of our Class A common shares from the Nasdaq or deregistration from the SEC, or both. Moreover, any negative news about the proceedings against these audit firms may adversely affect investor confidence in China-based companies listed in the U.S. All these would adversely affect the market price of our ADSs and substantially reduce or effectively terminate the trading of our ADSs in the United States.

 

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Risks Related to Our Corporate Structure

If the PRC government finds that the agreements that establish the structure for operating our business in China do not comply with its restrictions on foreign investment in healthcare and Internet-related businesses, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our economic benefits in the assets and operations of our affiliated PRC entities.

We are a Cayman Islands company and as such we are classified as a foreign enterprise under PRC laws. Our PRC subsidiaries, Beijing iKang, Zhejiang iKang and Yuanhua WFOE, are foreign invested enterprises. Various laws, regulations and rules in China restrict foreign ownership in, and restrict foreign invested enterprises from holding certain licenses required to operate healthcare and Internet-related businesses. Although some of the restrictions on foreign investment in healthcare businesses were lifted in December 2011, restrictions still exist in practice. See “Our History and Corporate Structure — Our Corporate Structure” and “Regulation — Regulations Relating to Foreign Investment in Our Industry.” In light of these restrictions, we conduct our operations in China mainly through a series of contractual arrangements entered into (i) among Beijing iKang, our affiliated PRC entity, iKang Holding, and iKang Holding’s shareholders, (ii) among Zhejiang iKang, our affiliated PRC entity, iKang Hangzhou Xixi, and iKang Hangzhou Xixi’s shareholders, (iii) among Yuanhua WFOE, our affiliated PRC entity, Yuanhua Information, and Yuanhua Information’s shareholders and (iv) among Beijing iKang, Beijing Jiandatong, and Mr. Haiqing Hu, one of Beijing Jiandatong’s shareholders who holds a 80% equity interest in Beijing Jiandatong. iKang Holding, iKang Holding’s subsidiaries, iKang Hangzhou Xixi, Shanghai Yuanhua Clinic Co., Ltd., and Beijing Jiandatong hold the licenses that are essential to the operation of our business.

We do not have any equity interest in our affiliated PRC entities but through such contractual arrangements we exercise effective control over our affiliated PRC entities. For a description of such contractual arrangements, see “Our History and Corporate Structure.” As a result, we are considered the primary beneficiary of our affiliated PRC entities and consolidate the results of operations of our affiliated PRC entities and their subsidiaries in our financial statements.

In the opinion of King & Wood Mallesons Lawyers, our PRC legal counsel, our current ownership structure, the ownership structure of our PRC subsidiaries and affiliated PRC entities and the contractual arrangements among our PRC subsidiaries, our affiliated PRC entities and their respective shareholders are not in violation of existing PRC laws, rules and regulations and each contract under the contractual arrangements is valid, binding and enforceable under current PRC laws. However, our PRC legal counsel has also advised us that there are substantial uncertainties regarding the interpretation and application of current and future PRC laws and regulations; accordingly, PRC regulatory authorities may ultimately take a view that is contrary to the opinion of King & Wood Mallesons Lawyers.

In addition, PRC regulatory authorities may change their policies to further restrict foreign participation in healthcare and Internet-related businesses. Accordingly, we cannot assure you that the PRC regulatory authorities will not ultimately take a view contrary to that of our PRC legal counsel. If we, our PRC subsidiaries, our affiliated PRC entities or their respective subsidiaries are found to be in violation of any existing or future PRC laws, rules or regulations, we may not be able to consolidate the results of operations of our affiliated PRC entities and their subsidiaries. In addition, the relevant regulatory authorities would have broad discretion in dealing with such violations, including:

 

   

revoking the business licenses or operating licenses of our PRC subsidiaries or affiliated PRC entities and their respective subsidiaries;

 

   

discontinuing or restricting our operations in China, including shutting down our servers or blocking our websites or discontinuing or placing restrictions or onerous conditions on our operations;

 

   

restricting our ability to collect revenues or confiscating our income or the income of our PRC subsidiaries or affiliated PRC entities;

 

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requiring us to undergo a costly and disruptive restructuring such as forcing us to transfer our equity interests in our PRC subsidiaries to a domestic entity or invalidating the agreements that our PRC subsidiaries have entered into with our affiliated PRC entities and their respective shareholders;

 

   

requiring us to establish a new enterprise, re-applying for required licenses or relocating our businesses, staff and assets;

 

   

imposing additional conditions or requirements with which we may not be able to comply;

 

   

restricting or prohibiting our use of proceeds from this offering to finance our business and operations in China; and

 

   

taking other regulatory or enforcement actions, including levying fines, that could be harmful to our business.

The imposition of any of these penalties may result in a material and adverse effect on our ability to conduct our business and a loss of our economic benefits in the assets and operations of our affiliated PRC entities. In addition, if the imposition of any of these penalties causes us to lose the rights to direct the activities of the affiliated entities or our right to receive their economic benefits, we would no longer be able to consolidate these entities. These entities contribute substantially all of our consolidated net revenues.

We rely on contractual arrangements with our affiliated PRC entities and their respective shareholders for the operation of our business, which may not be as effective as direct ownership. If our affiliated PRC entities and their shareholders fail to perform their obligations under these contractual arrangements, we may have to resort to litigation to enforce our rights, which may be time-consuming, unpredictable, expensive and damaging to our operations and reputation.

We conduct our business in China mainly through our affiliated PRC entities and their respective subsidiaries. The contractual arrangements with our affiliated PRC entities and their respective shareholders provide us with effective control over our affiliated PRC entities and their subsidiaries. Although we have been advised by our PRC legal counsel, King & Wood Mallesons Lawyers, that each contract under these contractual arrangements is valid, binding and enforceable under current PRC laws, these contractual arrangements may not be as effective as direct ownership in providing us with control over our affiliated PRC entities and their subsidiaries. For example, our affiliated PRC entities and their shareholders may breach their contractual arrangements with us by, among other things, failing to operate our healthcare businesses in an acceptable manner, by refusing to renew these contracts when their initial term expires, or by taking other actions that are detrimental to our interests. If we were the controlling shareholder of our affiliated PRC entities with direct ownership, we would be able to exercise our rights as shareholders, rather than our rights under the powers-of-attorney, to effect changes to its board of directors, which in turn could implement changes at the management and operational level. However, under the current contractual arrangements, as a legal matter, if any of our affiliated PRC entities or its shareholders fails to perform their obligations under these contractual arrangements, we may incur substantial costs to enforce such arrangements and rely on legal remedies under PRC laws, which may not be sufficient or effective. These remedies may include seeking specific performance or injunctive relief and claiming damages, any of which may not be sufficient or effective. In addition, our contractual arrangements have different expiration dates based on their respective nature. See “Our History and Corporate Structure — Our Corporate Structure.”

These contractual arrangements are governed by PRC laws and provide for the resolution of disputes through arbitration in the PRC. Accordingly, these contracts would be interpreted in accordance with PRC laws and any disputes would be resolved in accordance with PRC legal procedures, which could be adjudicated as invalid by arbitral tribunals. The PRC regulatory environment presents inherent uncertainties. See “— Risks Related to Doing Business in China — Uncertainties presented by the PRC legal system could limit the legal protections available to us and subject us to legal risks, which could have a material adverse effect on our

 

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business, financial condition and results of operations.” As a result, our rights under the contractual arrangements could not be honored and our ability to enforce these contracts under the contractual arrangements could be limited. If we are unable to enforce these contractual arrangements, or if we suffer significant delay or other obstacles in the process of enforcing these contractual arrangements, we may not be able to exert effective control over our affiliated PRC entities and their shareholders. As a result, our business and operations could be severely disrupted, which could damage our reputation and materially and adversely affect our business, financial condition, results of operations and prospects.

Shareholders of iKang Holding, Yuanhua Information or Beijing Jiandatong, our affiliated PRC entities, may have a potential conflict of interest with us, and they may breach their contracts with us or cause such contracts to be amended in a manner contrary to the interest of our company.

One of our affiliated PRC entities, iKang Holding, is jointly held by Mr. Ligang Zhang, chairman and chief executive officer of our company, and Mr. Boquan He, a director of our company. One of our affiliated PRC entities, Yuanhua Information, is jointly held by Mr. Lei Zhao and Mr. Haiqing Hu, persons designated by us. One of our affiliated PRC entities, Beijing Jiandatong, is jointly held by Mr. Haiqing Hu and Mr. Rui Ma, and Mr. Haiqing Hu is a person designated by us. Conflicts of interest between these individuals’ role as shareholders of our affiliated PRC entities and their fiduciary duties to our company or their personal interest may arise. In addition, Mr. Ligang Zhang is also a director and/or executive officer of certain subsidiaries of iKang Holding. The laws of China provide that a director or member of management owes a fiduciary duty to the company he serves. Mr. Ligang Zhang must therefore act in good faith and in the best interests of iKang Holding and its subsidiaries and must not use his respective positions for personal gain. These laws do not require him to consider our best interests when making decisions as a director or member of management of our affiliated PRC entities or their subsidiaries. In addition, the personal interest of the nominee shareholders of Yuanhua Information and Beijing Jiandatong is not necessarily aligned with us. Accordingly, conflict may arise between these individuals’ fiduciary duties as directors or officers of our affiliated entities and us.

When conflicts of interest arise, these individuals may not act in the best interests of our company and conflicts of interest may not be resolved in our favor. In addition, these individuals may breach or cause iKang Holding, Yuanhua Information or Beijing Jiandatong to breach or refuse to renew the existing contracts under the contractual arrangements that allow us to effectively control iKang Holding, Yuanhua Information or Beijing Jiandatong and their respective subsidiaries and receive economic benefits from them. Currently, we do not have arrangements to address potential conflicts of interest between these individuals and us. If we cannot resolve any conflicts of interest or disputes between us and the shareholders of iKang Holding, we would have to rely on legal proceedings, which could result in disruption of our business, and there would be substantial uncertainty as to the outcome of any such legal proceedings.

The contractual arrangements with our affiliated PRC entities may be reviewed by the PRC tax authorities for transfer pricing adjustments, which could increase our overall tax liability.

The PRC Enterprise Income Tax Law, effective on January 1, 2008, or the EIT Law, requires every enterprise in China to submit its annual enterprise income tax return together with a report on transactions with its related parties to the relevant tax authorities. The PRC tax authorities may impose reasonable adjustments on taxation if they have identified any related-party transactions that are inconsistent with arm’s-length principles. Beijing iKang, Zhejiang iKang and Yuanhua WFOE could face material adverse tax consequences if the PRC tax authorities determined that the contractual arrangements between them and our affiliated PRC entities were not entered into based on arm’s-length negotiations and therefore constitute a favorable transfer pricing arrangement. Although we based our contractual arrangements on those of similar businesses, if the PRC tax authorities determined that these contracts were not entered into on an arm’s-length basis, they could request that our affiliated PRC entities adjust their taxable income upward for PRC tax purposes. Such a pricing adjustment could adversely affect us by increasing our affiliated PRC entities tax expenses without reducing Beijing iKang, Zhejiang iKang or Yuanhua WFOE’s tax

 

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expenses, and could subject our affiliated PRC entities to late payment fees and other penalties for underpayment of taxes. As a result, our consolidated net income may be adversely affected.

We may lose the ability to use and enjoy assets held by our PRC variable interest entities that are important to the operation of our business if such entities go bankrupt or become subject to a dissolution or liquidation proceeding.

Some of our PRC variable interest entities hold assets, such as medical equipments that are essential to the operation of our business. If any of these PRC variable interest entities goes bankrupt and all or part of its assets become subject to liens or rights of third party creditors, we may be unable to continue some or all of our business activities, which could materially and adversely affect our business, financial condition and results of operations. If any of such PRC variable interest entities undergoes a voluntary or involuntary liquidation proceeding, the unrelated third party creditors may claim rights to some or all of these assets, thereby hindering our ability to operate our business, which could materially and adversely affect our business, financial condition and results of operations.

Risks Related to Doing Business in China

Changes in China’s economic, political and social conditions could have a material adverse effect on our business, financial condition, results of operations and prospects.

We conduct substantially all our business operations in China. Accordingly, our business, financial condition, results of operations and prospects are significantly dependent on the economic, political and social conditions in China. The PRC economy differs from the economies of developed countries in many aspects, including the degree of government involvement, level of development, growth rate, control over foreign exchange and allocation of resources. While the PRC economy has experienced significant growth over the past 30 years, the growth has been uneven across different regions and periods and among various economic sectors in China. Moreover, the continued economic growth in China over the past few years has resulted in a general increase in labor costs, and the inflationary environment that has persisted in recent periods has led to labor strikes and employee discontent, which could result in materially higher compensation costs being paid to employees. We cannot assure you that the ongoing evolution of economic, political and social conditions in China would not materially reduce our revenues and profitability.

The PRC government exercises significant control over China’s economic growth through the allocation of resources, control over payment of foreign currency-denominated obligations, implementation of monetary policy and offer of preferential treatment to particular industries or companies. In particular, certain measures adopted by the PRC government, such as changes in statutory deposit reserve ratio and lending guidelines for commercial banks promulgated by the People’s Bank of China, or the PBOC, may restrict loans to certain industries. These current and future government actions could materially affect our liquidity as well as restrict our access to capital and ability to operate our business.

Although the Chinese economy has grown significantly in the past decade, that growth may not continue and any slow-down may have a negative effect on our business. Since 2012, the growth of the Chinese economy has slowed. The overall Chinese economy affects our profitability and any slowdown in the economic growth of China could lead to reduced consumable income of our customers and reduced demand for our services, which could materially and adversely affect our business, financial condition, results of operations and prospects.

Uncertainties presented by the PRC legal system could limit the legal protections available to us and subject us to legal risks, which could have a material adverse effect on our business, financial condition and results of operations.

Our operations in China are subject to applicable PRC laws, rules and regulations. The PRC legal system is largely a civil law legal system based on written statutes. Unlike the common law system, court decisions in

 

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China may be cited for reference but have limited precedential value. Although the overall effect of legislation over the past 30 years has significantly enhanced the protections afforded to various forms of foreign investment in China, the PRC has not developed a fully integrated legal system and recently enacted laws, rules and regulations may not sufficiently cover all aspects of economic activities. In particular, because these laws, rules and regulations are relatively new, and because of the limited volume of published judicial decisions and their non-binding nature, the interpretation and enforcement of these laws, rules and regulations involve substantial uncertainties. Such uncertainties may limit the legal protections available to us.

In addition, the PRC legal system is based in part on government policies and certain internal rules, some of which are not published on a timely basis or at all and which may have a retroactive effect. As a result, we may not be aware of a violation of these policies and internal rules until sometime after the violation. Also, any administrative or court proceedings may be protracted, resulting in substantial costs and diversion of resources and management attention if we seek to enforce our legal rights through administrative or judicial proceedings. Moreover, compared to more developed legal systems, the PRC administrative and judicial authorities have significantly wider discretion in interpreting and implementing statutory and contractual provisions. As a result, it may be more difficult to evaluate the outcomes of the administrative and judicial proceedings as well as the level of available legal protection we are entitled to. These uncertainties may impede our ability to enforce our contracts, which could in turn materially and adversely affect our business and operations.

Our business may be adversely affected by regulations and censorship of content distributed over the Internet in China.

China has enacted laws and regulations governing Internet access and the distribution of information through the Internet. The PRC government from time to time bans the distribution of content and information through the Internet that it believes to be in violation of PRC laws or regulations. The MIIT and other relevant PRC authorities have promulgated regulations that prohibit content or information from being distributed or published if such content or information is found to, among other things, propagate obscenity, gambling or violence, instigate crimes, undermine public morality or the cultural traditions of China, or compromise state security or secrets. Failure to comply with these requirements may result in the revocation of licenses to provide Internet content or other operations licenses or permits, the closure of the concerned websites and reputational harm. Website operators may also be held liable for such censored information displayed on or linked to their websites. To the extent that PRC regulatory authorities find any content displayed on our websites objectionable, they may require us to limit or eliminate the dissemination of such content. In addition, regulatory authorities may impose penalties on us based on content displayed on or linked to our websites in cases of material violations, including a revocation of our operating licenses or a suspension or shutdown of our online operations.

Governmental control of currency conversion may limit our ability to utilize our revenues and financing proceeds effectively.

The PRC government imposes controls on the convertibility of Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. Substantially all of our revenues and operating expenses are denominated in Renminbi. The Renminbi is currently convertible under “current account” transactions, which includes dividend payment, trade and service-related foreign exchange transactions, but not under “capital account” transactions, which includes capital injection and loans. Our PRC subsidiaries may also retain foreign exchange in its current accounts, subject to a ceiling approved by the State Administration of Foreign Exchange, or the SAFE, to satisfy foreign exchange liabilities or to pay dividends. See “Regulation — Regulations Relating to Foreign Currency Exchange.” However, the relevant PRC regulatory authorities may limit or eliminate our ability to purchase and retain foreign currencies for current account transactions in the future. Since a significant amount of our future revenues will be denominated in Renminbi, any existing and future restrictions on currency exchange may limit our ability to utilize revenues generated in Renminbi to fund our business activities outside of the PRC that are denominated in foreign currencies.

 

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Foreign exchange transactions under the capital account are still subject to limitations and require approvals from, or registration with, the SAFE or its local branches and other relevant PRC regulatory authorities. In particular, if we finance our PRC subsidiaries by foreign currency loans, those loans cannot exceed certain statutory limits and must be registered with the SAFE or its local branches. If we finance our PRC subsidiaries by capital contributions using, for instance, proceeds from our initial public offering, those capital contributions must be approved by the Ministry of Commerce, or the MOFCOM, or its local branches. In addition, because of the regulatory restrictions related to foreign currency loans to, and non-ownership arrangement in, domestic PRC enterprises, we may not be able to finance our affiliated PRC entities and its subsidiaries’ operations by loans or capital contributions. We cannot assure you that we can obtain these governmental registrations or approvals on a timely basis, if at all. These limitations could affect the ability of these entities to obtain foreign exchange through debt or equity financing, and could adversely affect our business and financial conditions.

The approval of the China Securities Regulatory Commission, or the CSRC, may be required in connection with this offering, and the failure to obtain any required approval could have a material adverse effect on our business, operating results and reputation and trading price of the ADSs, and also create uncertainties for this offering.

In 2006, six PRC regulatory agencies, including the MOFCOM and the CSRC, jointly adopted the Rules on Mergers with and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, which became effective on September 8, 2006 and were amended on June 22, 2009. See “Regulation — New M&A Rules and Regulations Relating to Overseas Listing.” Under the M&A Rules, the prior approval of the CSRC is required for the overseas listing of offshore special purpose vehicles that are directly or indirectly controlled by PRC companies or individuals and used for the purpose of listing PRC onshore interests on an overseas stock exchange. The application of the M&A Rules remains unclear. Our PRC legal counsel, King & Wood Mallesons Lawyers, has advised us that based on its understanding of the current PRC laws, rules and regulations and the M&A Rules, prior approval of the CSRC is not required under the M&A Rules for the listing and trading of the ADSs on Nasdaq because, among other reasons, (i) Beijing iKang, Zhejiang iKang and Yuanhua WFOE were incorporated as wholly foreign owned enterprises by means of foreign direct investment, rather than being converted into wholly foreign owned enterprises through merger and acquisition of PRC domestic enterprises, and (ii) there is no provision in the M&A Rules that clearly classifies the contractual arrangements between Beijing iKang and iKang Holding, between Zhejiang iKang and iKang Hangzhou Xixi, between Yuanhua WFOE and Yuanhua Information and between Beijing iKang and Beijing Jiandatong as a kind of merger and acquisition transaction falling under the M&A Rules. Although we have no plan to apply for approval from the CSRC based on the advice of King & Wood Mallesons Lawyers, the relevant PRC government agencies, including the CSRC, may reach a different conclusion.

King & Wood Mallesons Lawyers has further advised us that uncertainties still exist as to how the M&A Rules will be interpreted and implemented and its opinions summarized above are subject to any new laws, rules and regulations or detailed implementations and interpretations in any form relating to the M&A Rules. If the CSRC or other PRC regulatory agencies subsequently determine that we need to obtain CSRC approval for this offering either by interpretation, clarification or amendment of the M&A Rules or by any new rules, regulations or directives promulgated after the date of this prospectus, we may face sanctions by the CSRC or other PRC regulatory agencies. These sanctions may include fines and penalties on our operations in China, limitations on our operating privileges in China, delays or restrictions on the repatriation of the proceeds from this offering into the PRC, restrictions on or prohibition of the payments or remittance of dividends by our PRC subsidiaries, or other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as this offering and the trading price of the ADSs. The CSRC or other PRC regulatory authorities may also take actions requiring us, or making it advisable for us, to halt this offering before settlement and delivery of the ADSs offered hereby. Consequently, if you engage in market trading or other activities in anticipation of and prior to settlement and delivery, you do so at the risk that such settlement and delivery may not occur.

 

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We cannot predict when the CSRC will promulgate additional rules or other guidance. If additional rules or guidance is issued prior to the completion of this offering, and, consequently, we conclude that we are required to obtain the CSRC approval, this offering will be delayed until we obtain the CSRC approval, which may take several months or even longer. Moreover, additional rules or guidance, to the extent issued, may fail to resolve ambiguities under the M&A Rules. Uncertainties or negative publicity regarding the M&A Rules also could materially and adversely affect the trading price of the ADSs.

The M&A Rules and other regulations may make it more difficult for us to make future acquisitions or dispositions of our business operations or assets in China.

The Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time-consuming and complex. Such regulations require, among other things, that the Ministry of Commerce be notified in advance of any change-of-control transaction in which a foreign investor acquires control of a PRC domestic enterprise or a foreign company with substantial PRC operations, if certain thresholds under the Provisions on Thresholds for Prior Notification of Concentrations of Undertakings, issued by the State Council on August 3, 2008, were triggered. In addition, PRC national security review rules which became effective on September 1, 2011 require acquisitions by foreign investors of PRC companies engaged in military related or certain other industries that are crucial to national security be subject to security review before consummation of any such acquisition. It is not certain whether businesses we may acquire would fall within the scope of industries required for national security review and whether such acquisitions may be required to go through the national security review process. Complying with the requirements of these regulations to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval from the Ministry of Commerce, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share, as well as our overall competitiveness.

PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident beneficial owners or our company to liabilities or penalties, limit our ability to contribute capital to our PRC subsidiaries, limit the ability of our PRC subsidiaries to increase their registered capital or distribute profits to us, or otherwise materially and adversely affect us.

The SAFE has promulgated several regulations, including the Notice Concerning Foreign Exchange Controls on Domestic Residents’ Financing and Roundtrip Investment Through Offshore Special Purpose Vehicles, or Circular 75, effective on November 1, 2005. These regulations and rules require PRC residents and corporate entities to register with, and obtain approval from, provincial SAFE branches in connection with their direct or indirect offshore investment activities. See “Regulation — Regulations Relating to Foreign Currency Exchange.” These regulations and rules apply to our shareholders who are PRC residents and may apply to any offshore acquisitions that we make in the future.

Under Circular 75, a PRC resident who makes, or has previously made, a direct or indirect investment in an offshore company for the purpose of capital financing with assets or equities of PRC enterprises, referred to as offshore special purpose vehicles, or Offshore SPV, is required to register that investment with the local branch of the SAFE. In addition, any PRC resident who is a direct or indirect shareholder of an Offshore SPV is required to update the previously filed registration with the relevant provincial the SAFE branch to reflect any material change with respect to the Offshore SPV’s roundtrip investment, capital variation, merger, division, long-term equity or debt investment or creation of any security interest. If any PRC shareholder fails to make the required registration or update the previously filed registration, the PRC subsidiaries of that Offshore SPV may be prohibited from distributing their profits and the proceeds from any reduction in capital, share transfer or liquidation to their offshore parent company, and the offshore parent company may also be prohibited from contributing additional capital into its PRC subsidiaries. Furthermore, failure to comply with the various foreign exchange registration requirements described above could result in liability under the PRC laws for evasion of applicable foreign exchange restrictions.

 

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We have requested our relevant shareholders who are subject to the SAFE regulations to make the necessary registrations under Circular 75. However, we may not be fully informed of the identities of the beneficial owners of our company. Our shareholders, including Mr. Ligang Zhang, Mr. Boquan He, Ms. Feiyan Huang, Mr. Wenqing Tan, Mr. Minjian Shi, Ms. Yafang Zhou, Mr. Bin Hu, Mr. Ning Huang and Mr. Yihuang Hu, have registered with the local SAFE branch as required under Circular 75 and are currently in the process of amending their registrations pursuant to Circular 75 to reflect the changes of their ownership in our company. However, Mr. Baoqing Liu, who indirectly holds 1.35% of our outstanding common shares before this offering, has not registered with SAFE pursuant to Circular 75. There is no assurance that our shareholders and beneficial owners of our shares who are PRC residents can complete the necessary registrations and amendments under Circular 75 in a timely manner or at all, or will comply with the requirements under Circular 75 or other related rules in the future. Any failure by our shareholders or beneficial owners of our shares who are PRC residents to comply with these regulations and rules could subject us to fines or legal sanctions, including restrictions on the ability of our PRC subsidiaries to pay dividends or make distributions to, or obtain foreign currency-denominated loans from, us, as well as restrictions on our ability to increase our investment in China. As a result, our business and prospects, as well as our ability to distribute profits to you, could be materially and adversely affected.

Our holding company structure may restrict our ability to receive dividends or other payments from our PRC subsidiaries and our affiliated PRC entities, which could restrict our ability to act in response to changing market conditions and to satisfy our liquidity requirements.

We are a holding company, and we may rely on dividends and other distributions on equity to be paid by our PRC subsidiaries for our cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders and service any debt we may incur. If any of our PRC subsidiaries incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other distributions to us. Under PRC laws and regulations, our PRC subsidiaries, as foreign-invested enterprises in the PRC, may pay dividends only out of their respective accumulated profits as determined in accordance with PRC accounting standards and regulations. In addition, a foreign-invested enterprise in China is required to set aside at least 10% of its accumulated after-tax profits each year, if any, to fund certain statutory reserve funds, until the aggregate amount of such a fund reaches 50% of its registered capital. At its discretion, it may allocate a portion of its after-tax profits based on PRC accounting standards to an enterprise expansion fund and a staff welfare and bonus fund. These enterprise expansion reserve and staff welfare and bonus funds are not distributable as cash dividends. As of March 31, 2013, except for iKang Nanjing Gulou, none of our PRC subsidiaries, our affiliated PRC entities and their respective subsidiaries had a statutory reserve fund that reached 50% of their respective registered capital. Therefore, our PRC subsidiaries, our affiliated PRC entities and their respective subsidiaries (except for iKang Nanjing Gulou) would continue to allocate at least 10% of their respective after-tax profits to the statutory reserve fund until the aggregate amount of such a fund reaches the 50% threshold.

Our PRC subsidiaries do not have equity interests in the affiliated PRC entities. Our affiliated PRC entities may distribute their profits to us primarily by means of paying service and consulting fees or by other means permitted by law, which would be subject to additional PRC taxes generally at the rate of 5% or 6% of the total fees paid by the affiliated PRC entities to our PRC subsidiaries. In addition, the PRC tax authorities could request that our affiliated PRC entities adjust their taxable income upward for PRC tax purposes if such authorities determined that the contractual arrangements between our PRC subsidiaries and affiliated PRC entities were not entered into based on arm’s-length principles, which could materially and adversely affect our affiliated PRC entities’ ability to distribute their profits to us. See “— Risks Related to Corporate Structure — The contractual arrangements with our affiliated PRC entities may be reviewed by the PRC tax authorities for transfer pricing adjustments, which could increase our overall tax liability.” In addition, our PRC subsidiaries generally should audit their yearly financial statements according to PRC GAAP and pass resolutions for dividend distribution prior to paying dividend to us. Furthermore, dividends paid to us by our PRC subsidiaries are subject to the 10% withholding tax unless we are considered a PRC resident enterprise under the EIT Law and such dividends qualify as tax-exempt income. See “— Our global income and the dividends that we may receive from our PRC

 

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subsidiaries may be subject to PRC taxes under the EIT Law, which may have a material adverse effect on our results of operations” and “— Regulations Relating to Taxation — Enterprise Income Tax.”

As a result of these PRC laws and regulations and the requirement that distributions by PRC entities can only be paid out of distributable profits computed in accordance with PRC accounting standards and regulations, our PRC subsidiaries, our affiliated PRC entities and their respective subsidiaries are restricted from transferring a portion of their net assets to us. Amounts restricted include paid-in capital and the statutory reserves of our PRC subsidiaries, affiliated PRC entities and their respective subsidiaries. The aggregate amounts of capital and statutory reserves restricted which represented the amount of net assets of the relevant subsidiaries and affiliated PRC entities not available for distribution was US$110.1 million as of December 31, 2013.

Any limitation on the ability of our PRC subsidiaries to pay dividends or make other distributions to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business. See “— Our global income and the dividends that we may receive from our PRC subsidiaries may be subject to PRC taxes under the EIT Law, which may have a material adverse effect on our results of operations.”

PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using our net proceeds from this offering to make loans or additional capital contributions to our PRC operating subsidiaries.

As the offshore holding company of our PRC subsidiaries, we may use the net proceeds from this offering to extend loans to or make additional capital contributions to our PRC subsidiaries. Any loans by us to our PRC subsidiaries to finance the operations of our PRC subsidiaries, which are foreign-invested enterprises, may not exceed statutory limits and are required to be registered with the SAFE or its local branches. We may also decide to finance our PRC subsidiaries by means of capital contributions. These capital contributions must be approved by the MOFCOM or its local branches. We cannot assure you that we will be able to obtain these government approvals or registrations on a timely basis, if at all. If we fail to obtain such approvals or registrations, our ability to use our net proceeds from this offering and to capitalize our operations in China may be severely restricted, and could materially and adversely affect our liquidity and our ability to fund and expand our business.

On August 29, 2008, the SAFE promulgated the Circular of Operation Issues Related to the Improvement of the Administration of Payment-Related Settlement of FIEs’ Registered Capital from Foreign Exchange to Renminbi, or Circular 142, which provided that the registered capital of a foreign-invested company converted from foreign currencies may (i) only be used for purposes within the business scope approved by the applicable governmental authority and (ii) not be used for equity investments by the foreign-invested company within the PRC unless otherwise provided. Violations of Circular 142 could result in severe penalties, including fines. Furthermore, the SAFE promulgated an official notice in November 2010 which requires the authenticity of settlement of net proceeds from an offshore offering to be closely examined and the net proceeds to be settled in the manner described in the offering documents. The SAFE also promulgated the Notice on Relevant Administrative Issues on Clarifying and Standardizing the Foreign Exchange Transactions of Certain Capital Accounts, or Circular 45, in November 2011, which, among other things, restricts a foreign-invested enterprise from using Renminbi converted from foreign currency to provide entrusted loans or repay inter-company loans. In addition, the SAFE strengthened its supervision of the flow and use of Renminbi funds converted from the foreign currency-denominated capital of a foreign invested company. These regulations and rules may significantly limit our ability to transfer the net proceeds from this offering to our affiliated PRC entities or their respective subsidiaries through our PRC subsidiaries in China, which may adversely affect the business expansion of our affiliated PRC entities or their respective subsidiaries, and our affiliated PRC entities and their respective subsidiaries may not be able to convert the net proceeds from this offering into Renminbi to invest in or acquire any other PRC companies, or establish other variable interest entities in the China. See “Regulation — Regulations Relating to Foreign Currency Exchange.”

 

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A failure to comply with PRC regulations regarding the registration of shares and share options held by our employees who are PRC domestic individuals may subject such employees or us to fines and legal or administrative sanctions.

In February 2012, the SAFE promulgated the Notice on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plans of Overseas Publicly-Listed Companies, or Circular 7, which replaced the Application Procedures of Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Ownership Plans or Stock Option Plans of Overseas Publicly-Listed Companies issued by the SAFE in March 2007, or Circular 78. Under these rules, PRC residents who participate in stock incentive plan in an overseas publicly-listed company are required to register with the SAFE or its local branches and complete certain other procedures. Participants of a stock incentive plan who are PRC residents must retain a qualified PRC agent, which could be a PRC subsidiary of such overseas publicly-listed company or another qualified institution selected by such PRC subsidiary, to conduct the SAFE registration and other procedures with respect to the stock incentive plan on behalf of its participants. Such participants must also retain an overseas entrusted institution to handle matters in connection with their exercise of stock options, the purchase and sale of corresponding stocks or interests and fund transfers. In addition, the PRC agent is required to amend the SAFE registration with respect to the stock incentive plan if there is any material change to the stock incentive plan, the PRC argent or the overseas entrusted institution or other material changes. We and our PRC resident employees who have been granted share options, or PRC option holders, will be subject to these rules upon the listing and trading of the ADSs on the Nasdaq. If we or our PRC option holders fail to comply with these rules, we or our PRC option holders may be subject to fines and legal or administrative sanctions, as a result of which our business operations and equity incentive plans could be materially and adversely affected. See “Regulation — Regulations Relating to Foreign Currency Exchange — Employee Stock Option Plan.”

Our global income and the dividends that we may receive from our PRC subsidiaries may be subject to PRC taxes under the EIT Law, which may have a material adverse effect on our results of operations.

Under the EIT Law, and the Implementation Regulations to the PRC Enterprise Income Tax Law, or the EIT Law Implementation Regulations, both effective from January 1, 2008, an enterprise established outside of the PRC with its “de facto management body” within the PRC is considered to be a “resident enterprise” and will be subject to enterprise income tax at the rate of 25% on its worldwide income. The EIT Law Implementation Regulations define the term “de facto management body” as a management body that exercises full or substantial control and management authority over the production, operation, personnel, accounts and assets of an enterprise. The State Administration of Taxation, or the SAT, issued the Notice Regarding the Determination of Chinese-Controlled Offshore Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, or Circular 82, on April 22, 2009. Circular 82 provides certain specific criteria for determining whether the “de facto management body” of a Chinese-controlled offshore incorporated enterprise is located in China. On July 27, 2011, the SAT issued Administrative Measures of Enterprise Income Tax of Chinese-controlled Offshore Incorporated Resident Enterprises (Trial), or Bulletin 45, which became effective on September 1, 2011, to provide further guidance on the implementation of Circular 82. Bulletin 45 clarifies certain issues related to determining PRC resident enterprise status, post-determination administration and which competent tax authorities are responsible for determining offshore incorporated PRC resident enterprise status. Bulletin 45 specifies that when provided with a copy of a Chinese tax resident determination certificate issued by the competent tax authorities from an offshore incorporated PRC resident enterprise, the payer should not withhold 10% income tax when paying Chinese-sourced dividends, interest and royalties to the offshore incorporated PRC resident enterprise. See “Regulation — Regulations Relating to Taxation — Enterprise Income Tax.” Although Circular 82 applies only to offshore enterprises controlled by PRC enterprises or PRC corporate groups and not those controlled by PRC individuals or non-PRC persons, the determining criteria set forth in Circular 82 may reflect the SAT’s general position on how the “de facto management body” test should be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises or individuals or foreign enterprises.

 

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We do not believe that we should be treated as a PRC resident enterprise, however, it is unclear whether we will be classified as a PRC resident enterprise. If we are treated as a PRC resident enterprise for PRC enterprise income tax purposes, we would be subject to the 25% enterprise income tax rate on our global income as well as PRC enterprise income tax reporting obligations. Although under the EIT Law and the EIT Law Implementing Regulations if we were treated as a PRC tax resident enterprise dividends paid to us from our PRC subsidiaries should qualify as tax-exempt income, there is no assurance that we would enjoy such tax-exempt treatment on dividends paid to us from our PRC subsidiaries in the same manner as offshore incorporated PRC resident enterprises controlled by PRC enterprises or PRC corporate groups enjoy under Bulletin 45. As a result, such dividends may continue to be subject to a 10% withholding tax, as the SAT and other PRC authorities have not yet issued guidance with respect to the treatment of outbound remittances to entities that are treated as resident enterprises controlled by PRC individuals and non-PRC persons, like us, for PRC enterprise income tax purposes.

We may be required to withhold PRC income tax on the dividends we pay you (if any), and any gain you realize on the transfer of our common shares and/or ADSs may be subject to PRC tax if we are treated as a PRC “resident enterprise.”

Pursuant to the EIT Law, we may be treated as a PRC resident enterprise for PRC tax purposes. See the previous risk factor. If we are so treated by the PRC tax authorities, we may be obligated to withhold PRC income tax on payments of dividends on our common shares and/or ADSs to investors that are non-resident enterprises of the PRC because the dividends payable on our common shares and/or ADSs may be regarded as being derived from sources within the PRC. The withholding tax rate would generally be 10% on dividends paid to non-resident enterprises unless such non-resident enterprise is entitled to a lower rate under a tax treaty if such non-resident enterprise is considered as a beneficial owner as defined under the Circular on How to Interpret and Recognize the “Beneficial Owner” in Tax Treaties issued by the SAT in October 2009. In addition, if we are treated as a PRC tax resident enterprise, any gain realized by investors who are non-resident enterprises of the PRC from the transfer of our common shares or ADSs may be regarded as being derived from sources within the PRC and be subject to a 10% tax. See “Taxation — PRC Taxation.”

Moreover, if we are treated as a PRC resident enterprise, it is possible that a non-resident individual investor would be subject to PRC individual income tax at a rate of 20% (unless such investor is entitled to a lower rate under a tax treaty) under the PRC Individual Income Tax Law, or IITL, on dividends paid to such investor and any capital gains realized from the transfer of our common shares and/or ADSs if such dividends and gains are deemed income derived from sources within the PRC. Under the PRC-U.S. tax treaty, a 10% rate will apply to dividends, provided certain conditions are met. A non-resident individual is an individual who is not domiciled in the PRC and does not reside within the PRC or has resided within the PRC for less than one year. Pursuant to the IITL and its implementation rules, for purposes of the PRC capital gains tax, the taxable income will be based on the total income obtained from the transfer of our common shares or ADSs minus all the costs and expenses that are permitted under PRC tax laws to be deducted from the income. The foregoing PRC tax may reduce your investment return on our common shares and ADSs and may also affect the price of our common shares and ADSs.

The PRC tax authorities’ enhanced scrutiny of PRC enterprise income tax on offshore equity transfers may have a negative impact on your investment in the ADSs.

In connection with the EIT Law, the Ministry of Finance and the SAT jointly issued, on April 30, 2009, the Notice on Issues Concerning Process of Enterprise Income Tax in Enterprise Restructuring Business, or Circular 59. On December 10, 2009, the SAT issued the Notice Concerning the Strengthening of Enterprise Income Tax Administration with Respect to Equity Transfers by Non-resident Enterprises, or Circular 698. Both Circular 59 and Circular 698 became effective retroactively as of January 1, 2008. By promulgating and implementing these rules, the PRC tax authorities have enhanced their scrutiny over the direct or indirect transfer of equity interests in a PRC resident enterprise by a non-PRC resident enterprise. The PRC tax authorities have the discretion under

 

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Circular 698 to make adjustments to the taxable capital gains based on the difference between the fair value of the equity interests transferred and the cost of investment.

Under Circular 698, if a non-PRC resident enterprise transfers the equity interests of a PRC resident enterprise indirectly via disposing of the equity interests of an overseas holding company, or Indirect Transfer, and such overseas holding company is located in a tax jurisdiction that: (i) has an effective tax rate less than 12.5% or (ii) does not tax foreign income of its residents, the non-PRC resident enterprise is required to report the Indirect Transfer to the competent PRC tax authority. Using a “substance over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of avoiding PRC tax. As a result, gains derived from such Indirect Transfer may be subject to PRC tax at the rate of up to 10%. The PRC tax authorities may enforce Circular 698 with respect to the transfer of equity interests in our company or our non-PRC subsidiaries by non-PRC resident investors other than transfer of equity securities through public markets, such as the Nasdaq where our ADSs are expected to be listed.

Circular 698 also provides that, where a non-PRC resident enterprise transfers its equity interests in a PRC “resident enterprise” to its related parties at a price lower than the fair market value, the relevant PRC tax authority has the power to make a reasonable adjustment to the taxable income of the transaction. In addition, the PRC “resident enterprise” is supposed to provide necessary assistance to support the enforcement of Circular 698.

There is little guidance and practical experience as to the application of Circular 698, and it is possible that the PRC tax authorities would pursue our offshore shareholders to conduct a filing regarding our offshore restructuring transactions where non-resident investors were involved and would request our PRC subsidiary to assist in providing such disclosures. In addition, if our offshore subsidiaries are deemed to lack substance they could be disregarded by the PRC tax authorities. Our shareholders have made some share transfers in our company and not made tax filings in accordance with Circular 698. As a result, we and our existing non-PRC resident investors may be at risk of being taxed under Circular 698 and may be required to expend valuable resources to comply with Circular 698 or to establish that we should not be taxed under Circular 698, which may have a material adverse effect on our financial condition and results of operations or the non-PRC resident investors’ investments in us.

By promulgating and implementing these circulars, the PRC tax authorities have enhanced their scrutiny over the direct and indirect transfer of equity interests in a PRC resident enterprise by a non-PRC resident enterprise. The PRC tax authorities have the discretion under Circular 59 and Circular 698 to make adjustments to the taxable capital gains based on the difference between the fair value of the equity interests transferred and the cost of investment. We may pursue acquisitions in the future that may involve complex corporate structures. If we are considered a non-PRC resident enterprise under the EIT Law and if the PRC tax authorities make adjustments under Circular 59 or Circular 698, our income tax costs associated with such potential acquisitions will be increased, which may have an adverse effect on our financial condition and results of operations.

Fluctuations in the value of the Renminbi could result in foreign currency exchange losses.

The value of the Renminbi against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions and China’s foreign exchange policies. The conversion of Renminbi into foreign currencies, including U.S. dollars, has been based on exchange rates set by the PBOC. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi solely to the U.S. dollar. Under this revised policy, the Renminbi is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. Following the removal of the U.S. dollar peg, the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. Since July 2008, however, the Renminbi has traded within a narrow range against the U.S. dollar. As a consequence, the Renminbi has fluctuated significantly since July 2008 against other freely traded currencies, in tandem with the U.S. dollar. On

 

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June 20, 2010, the PBOC announced that the PRC government would further reform the Renminbi exchange rate regime and increase the flexibility of the exchange rate. It is difficult to predict how this new policy may impact the Renminbi exchange rate.

Substantially all of our revenues and operating expenses are denominated in Renminbi, while the net proceeds from this offering will be denominated in U.S. dollars. Consequently, fluctuations in exchange rates, primarily those involving the U.S. dollar, may affect the relative purchasing power of these proceeds and our balance sheet and earnings per share in U.S. dollars following this offering. In addition, appreciation or depreciation in the value of the Renminbi relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business, financial condition or results of operations. The Renminbi may appreciate or depreciate significantly in value against the U.S. dollar in the long term, depending on the fluctuation of the basket of currencies against which it is currently valued, or it may be permitted to enter into a full float, which may also result in a significant appreciation or depreciation of the Renminbi against the U.S. dollar.

The hedging options available in China to reduce our exposure to exchange rate fluctuations are quite limited. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able to hedge our exposure adequately or at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into foreign currency.

Our independent registered public accounting firm’s audit documentation related to their audit reports included in our registration statement may include audit documentation located in China. The Public Company Accounting Oversight Board currently cannot inspect audit documentation located in China and, as such, you may be deprived of the benefits of such inspection.

As an auditor of companies that are traded publicly in the United States and as an audit firm registered with the Public Company Accounting Oversight Board, or PCAOB, our independent registered public accounting firm is required by the laws of the United States to undergo regular inspections by the PCAOB. Our operations are conducted in China, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the PRC authorities. Accordingly, any audit documentation located in China related to our independent registered public accounting firm’s reports included in our filings with the SEC is not currently inspected by the PCAOB. On May 24, 2013, the PCAOB announced that it had entered into a memorandum of understanding on enforcement and cooperation with the CSRC and the PRC Ministry of Finance, or the MOF, which establishes a cooperative framework between the parties for the production and exchange of audit documents relevant to investigations in the United States and China. However, direct PCAOB inspections of independent registered accounting firms in China are still not permitted by Chinese authorities.

Inspections of certain other firms conducted by the PCAOB in jurisdictions outside of China have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. The lack of PCAOB inspections in China prevents the PCAOB from regularly evaluating audit documentation located in China and its related quality control procedures. As a result, our investors may be deprived of the benefits of the PCAOB’s oversight of our auditors through such inspections.

The inability of the PCAOB to conduct inspections of our auditors’ work papers in China makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections. Investors may consequently lose confidence in our reported financial information and procedures and the quality of our financial statements.

 

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The SEC’s recent administrative proceedings against five PRC-based accounting firms, including our independent registered public accounting firm, may affect our ability to meet our reporting obligations as a reporting company.

In December 2012, the SEC instituted administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley Act against the Chinese affiliates of the “big four” accounting firms, including our auditor, and also against BDO China Dahua. The Rule 102(e) proceedings initiated by the SEC related to these firms’ failure to produce documents, including audit work papers, at the request of the SEC pursuant to Section 106 of the SOX, as the auditors located in the PRC are not in a position to lawfully produce documents directly to the SEC due to restrictions under PRC law and specific directives issued by the CSRC. As the administrative proceedings are ongoing, it is impossible to determine their outcome or consequences for us. The issues raised by the proceedings are not specific to our auditor, or to us, but affect equally all audit firms based in China and all China-based businesses with securities listed in the United States. However, if the administrative judge were to find in favor of the SEC under the proceeding and depending upon the remedies sought by the SEC, these audit firms could be barred from practicing before the SEC. As a result, listed companies in the United States with major PRC operations may find it difficult or impossible to retain auditors for their PRC operations, which may result in their delisting. Moreover, any negative news about the proceedings against these audit firms may erode investor confidence in China-based, United States-listed companies and the market price of our ADSs may be adversely affected.

Risks Related to the ADSs and Class A Common Shares and This Offering

There has been no public market for our common shares or ADSs prior to this offering, and you might not be able to resell the ADSs at or above the price you paid, or at all.

Prior to this initial public offering, there has been no public market for our common shares or ADSs. We have applied to have the ADSs listed on the Nasdaq. Our common shares will not be listed or quoted for trading on any exchange. A liquid public market for the ADSs may not develop. The initial public offering price for the ADSs will be determined by negotiations between us and the representatives of the underwriters and may bear no relationship to the market price for the ADSs after the initial public offering. We cannot assure you that an active trading market for the ADSs will develop or that the market price of the ADSs will not decline below the initial public offering price.

The market price for the ADSs may be volatile and may be materially and adversely affected by fluctuations of the U.S. and global securities markets.

The market price for the ADSs may be volatile and subject to wide fluctuations in response to factors including the following:

 

   

general economic, political or social conditions in China;

 

   

fluctuations of exchange rates between Renminbi and U.S. dollar or other foreign currencies;

 

   

announcements by us or our competitors of acquisitions, strategic partnerships, joint ventures or capital commitments;

 

   

actual or anticipated fluctuations in our quarterly operating results;

 

   

changes in financial estimates by securities research analysts;

 

   

changes in the economic performance or market valuations of our centers;

 

   

addition or departure of our executive officers and key research personnel; and

 

   

release of lock-up or other transfer restrictions on our outstanding ADSs or common shares or sales of additional ADSs.

 

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In addition, the U.S. and global securities markets have from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of the ADSs.

As the initial public offering price is substantially higher than our net tangible book value per ADS, you will incur immediate and substantial dilution.

As the initial public offering price is substantially higher than the pro forma net tangible book value per share, you will incur immediate and substantial dilution. You will experience immediate and substantial dilution of approximately US$             per ADS (assuming no exercise of outstanding options to acquire common shares), representing the difference between our pro forma net tangible book value per ADS as of March 31, 2013, after giving effect to this offering and the initial public offering price of US$             per ADS. If you purchase ADSs in this offering, you will pay more for your ADSs than the amount paid by existing shareholders for their common shares on a per ADS basis. In addition, you will experience further dilution to the extent that our common shares are issued upon the exercise of share options. All of the common shares issuable upon the exercise of currently outstanding share options will be issued at a purchase price on a per ADS basis that is less than the initial public offering price per ADS in this offering. You will also experience dilution if our Class A common shares are issued upon the conversion of our preferred shares at an initial conversion ratio of 1:1 subject to adjustment. See “Dilution” for a more complete description of how the value of your investment in the ADSs will be diluted upon the completion of this offering.

We may need additional capital, and the sale of additional ADSs or other equity securities could result in additional dilution to our shareholders and the incurrence of additional indebtedness could increase our debt service obligations.

We believe that our current cash and cash equivalents, anticipated cash flow from operations and the proceeds from this offering will be sufficient to meet our anticipated cash needs for the foreseeable future. We may, however, require additional cash resources due to changed business conditions or other future developments, including any investments or acquisitions that we may decide to pursue. If these resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or to obtain a credit facility. The sale of additional equity and equity-linked securities could result in additional dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations. We do not currently have any specific plan to raise capital, and our ability to obtain additional financing will be subject to a number of factors, including general market conditions, investor acceptance of our plan of operations and results from our business operations. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all, particularly in light of the current global economic crisis.

Future sales or issuances, or perceived future sales or issuances, of substantial amounts of our common shares or ADSs could cause the price of the ADSs to decline significantly.

If our existing shareholders sell, or are perceived as intending to sell, substantial amounts of our common shares or ADSs, including those issued upon the exercise of our outstanding share options, following this offering, the market price of the ADSs could fall. Such sales, or perceived potential sales, by our existing shareholders might make it more difficult for us to issue new equity or equity-related securities in the future at a time and place we deem appropriate. All ADSs offered in this offering will be eligible for immediate resale in the public market without restrictions. The common shares outstanding after this offering may also be sold in the public market in the future, upon the expiration of the 180-day lock-up period beginning from the date of this prospectus, subject to volume and other restrictions as application under Rule 144 under the Securities Act. Any or all of these shares may be released prior to expiration of the lock-up period at the discretion of the representatives of the underwriters for this offering. To the extent shares are released before the expiration of the lock-up period and these shares are sold into the market, the market price of the ADSs could decline. Our

 

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existing shareholders are not subject to any contractual obligation to maintain their share ownership in us other than the lock-up obligations described above and in more detail in “Underwriting” and will be free to sell their shares in our company after the expiration of the lock-up period, subject to applicable securities law restrictions. See “Shares Eligible for Future Sale” and “Underwriting” for additional information regarding resale restrictions.

Your interest in the ADSs will be diluted as a result of share option grants or other arrangements which require us to issue additional shares.

We granted share options to our employees and advisors in 2004, 2005, 2006, 2007, 2010, 2012, 2013 and 2014. In February and April, 2013 and March 2014, we established three Share Incentive Plans to help us recruit and retain key employees, directors and consultants by providing incentives through the granting of equity awards. Under those Share Incentive Plans, we may issue equity awards in the form of share options, restricted shares or share appreciation rights. The maximum aggregate number of shares that may be issued pursuant to all awards shall not exceed 3,074,000 Class A common shares, assuming full exercise of all awards that may be granted under these three share incentive plans. For a description of this plan, see “Management — Share Incentive Plan.” As of December 31, 2013, there were 1,484,698 options outstanding, which entitle their holders to purchase a total of 1,484,698 Class A common shares. The exercise of options we have granted would result in a reduction in the percentage of ownership of the existing holders of Class A common shares and of ADSs, and therefore could result in a dilution in the earnings per common share and per ADS. You may face difficulties in protecting your interests, and your ability to protect your rights through the United States federal courts may be limited, because we are incorporated under Cayman Islands law.

You might not have the same voting rights as the holders of our Class A common shares and might not receive voting materials in time to be able to exercise your right to vote.

Except as described in this prospectus and in the deposit agreement, holders of the ADSs will not be able to exercise voting rights attaching to the shares evidenced by the ADSs on an individual basis. Holders of the ADSs will appoint the depositary or its nominee as their representative to exercise the voting rights attaching to the shares represented by the ADSs. You may not receive voting materials in time to instruct the depositary to vote, and it is possible that you, or persons who hold their ADSs through brokers, dealers or other third parties, will not have the opportunity to exercise a right to vote.

Under the deposit agreement for the ADSs, the depositary will give us a discretionary proxy to vote the shares underlying your ADSs at a shareholders’ meeting if you do not vote, unless:

 

   

we have failed to timely provide the depositary with our notice of meeting and related voting materials;

 

   

we have instructed the depositary that we do not wish a discretionary proxy to be given;

 

   

we have informed the depositary that there is substantial opposition as to a matter to be voted on at the meeting;

 

   

a matter to be voted on at the meeting would have a material adverse impact on shareholders; or

 

   

voting at the meeting is made by a show of hands.

The effect of this discretionary proxy is that you cannot prevent the shares underlying your ADSs from being voted, absent the situations described above, and it may be more difficult for holders of ADSs to influence the management of our company.

Your right as a holder of ADSs to participate in any future rights offerings may be limited, which may cause dilution to your holdings.

We may from time to time distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make rights available to the ADS holders in the United States unless we register the rights

 

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and the securities to which the rights relate under the Securities Act or an exemption from the registration requirements is available. In addition, the deposit agreement provides that the depositary will not make rights available to you unless the distribution to ADS holders of both the rights and any related securities are either registered under the Securities Act or exempted from registration under the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective. Moreover, we may not be able to establish an exemption from registration under the Securities Act. Accordingly, ADS holders may be unable to participate in our rights offerings and may experience dilution in their holdings. In addition, if the depositary is unable to sell rights that are not exercised or not distributed or if the sale is not lawful or reasonably practicable, it will allow the rights to lapse, in which case you will receive no value for these rights.

You may be subject to limitations on transfer of your ADSs.

Your ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems necessary in connection with the performance of its duties. The depositary may close its books from time to time for a number of reasons, including in connection with corporate events such as a rights offering, during which time the depositary needs to maintain an exact number of ADS holders on its books for a specified period. The depositary may also close its books in emergencies, and on weekends and public holidays. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deem it advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement.

Our dual class share structure with different voting rights will limit your ability to influence corporate matters and could discourage others from pursuing any change of control transactions that holders of our Class A common shares and ADSs may view as beneficial.

Immediately prior to the completion of this offering, our common shares will be divided into Class A common shares and Class C common shares. All Class C common shares will be held by Time Intelligent Finance Limited, a British Virgin Islands company ultimately owned by Mr. Ligang Zhang. Holders of Class A common shares will be entitled to one vote per share, while the holder of Class C common shares will be entitled to 15 votes per share, with Class A and Class C common shares voting together as one class on all matters subject to a shareholders’ vote. We will issue Class A common shares represented by our ADSs in this offering. A certain number of our outstanding Class A common shares held by Time Intelligent Finance Limited, will be redesignated as Class C common shares immediately prior to the completion of this offering. Currently, our founder, chairman and chief executive officer, Mr. Ligang Zhang, beneficially owns an aggregate of 16.7% of our outstanding shares. Upon the completion of this offering, Mr. Ligang Zhang will own an amount of Class C common shares, which taken together with the Class A common shares beneficially owned by Mr. Ligang Zhang, shall allow him to control the exercise of 36% of our voting power. Upon an exercise of the underwriters’ over-allotment option, Class A common shares held by an affiliate of Mr. Ligang Zhang shall be redesignated to Class C common shares such that after such exercise, the amount of Class C common shares and Class A common shares beneficially owned by Mr. Ligang Zhang, will continue to allow him to control the exercise of 36% of our voting power.

As a result of the dual class share structure and the concentration of ownership, Mr. Ligang Zhang has substantial influence over our business. This concentration of ownership may discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and may reduce the price of our ADSs. This concentrated control will limit your ability to influence corporate matters and could discourage others from pursuing any potential merger, takeover or other change of control transactions that holders of Class A common shares and ADSs may view as beneficial. For more information regarding our principal shareholders and their affiliated entities, see “Principal Shareholders.”

 

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The voting rights of holders of ADSs are limited by the terms of the deposit agreement.

A holder of the ADSs may only exercise the voting rights with respect to the underlying common shares in accordance with the provisions of the deposit agreement. Upon receipt of voting instructions of a holder of ADSs in the manner set forth in the deposit agreement, the depositary will endeavor to vote the underlying common shares in accordance with these instructions. Under our amended and restated memorandum and articles of association, the minimum notice period required for convening a general meeting is 10 clear days. When a general meeting is convened, you may not receive sufficient notice of a shareholders’ meeting to permit you to withdraw your common shares to allow you to cast your vote with respect to any specific matter. In addition, the depositary and its agents may not be able to send voting instructions to you or carry out your voting instructions in a timely manner. We will make all reasonable efforts to cause the depositary to extend voting rights to you in a timely manner, but we cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your shares. Furthermore, the depositary and its agents will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast, or for the effect of any such vote. As a result, you may not be able to exercise your right to vote and you may lack recourse if your common shares are not voted as you requested.

We will rely on the foreign private issuer exemption from most of the corporate governance requirements under the Nasdaq Stock Market Rules.

As a foreign private issuer whose ADSs are listed on the Nasdaq, we are permitted to follow certain home country corporate governance practices pursuant to exemptions under the Nasdaq Stock Market Rules. A foreign private issuer must disclose in its annual reports filed with the SEC each requirement under the Nasdaq Stock Market Rules with which it does not comply, followed by a description of its applicable home country practice. Our Cayman Islands home country practices may afford less protection to holders of our ADSs. Upon the completion of this offering, we will follow our home country practices and rely on certain exemptions provided by the Nasdaq Stock Market Rules to a foreign private issuer, including exemption from the requirement that we have a nominating and corporate governance committee and a compensation committee, each of which is composed entirely of independent directors. As a result of our reliance on the corporate governance exemptions available to foreign private issuers, you will not have the same protection afforded to shareholders of companies that are subject to all of Nasdaq’s corporate governance requirements.

Furthermore, because we qualify as a foreign private issuer under the Exchange Act, we will be exempt from certain provisions of the Exchange Act that are applicable to U.S. public companies, including (i) the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act, (ii) the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time, and (iii) the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q containing unaudited financial and other specified information, or current reports on Form 8-K, upon the occurrence of specified significant events. As a result, you may not be provided with the same benefits as a holder of shares of a U.S. issuer.

Our articles of association contain anti-takeover provisions that could have a material adverse effect on the rights of holders of our common shares and ADSs.

Our new memorandum and articles of association that will become effective upon the completion of this offering contain provisions limiting the ability of others to acquire control of our company or to cause us to enter into change-of-control transactions. These provisions could deprive our shareholders of opportunities to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transaction.

 

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The following provisions in our memorandum and articles of association may have the effect of delaying or preventing a change of control of our company:

 

   

our board of directors has the authority, without approval by the shareholders, to issue any unissued shares and determine the terms and conditions of such shares, including preferred, deferred or other special rights or restrictions with respect to dividends, voting and return of capital;

 

   

the shareholders may by ordinary resolution appoint a candidate as director of the board to fill a casual vacancy or as an addition to the existing board;

 

   

our board of directors or shareholder(s) who hold(s) more than 25% of the voting rights of our company having requisitioned for an extraordinary general meeting at least 21 days previously, have the right to convene an extraordinary general meeting, and the agenda of such meeting will be set by the directors or the shareholder(s) who hold more than 25% of the voting rights of our company who requested such meeting; and

 

   

the amended and restated articles of association may be amended only by a resolution passed at a shareholders’ meeting by a majority of at least two-thirds of the votes cast.

You may have difficulties in enforcing judgments obtained against us.

We are a Cayman Islands company and substantially all of our assets are located outside the United States. Substantially all of our current business and operations are conducted in China. In addition, except for David Ying Zhang, none of our directors and officers are nationals or residents of the United States, and a substantial portion of the assets of these persons is located outside the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the United States in the event that you believe that your rights have been infringed under the United States federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of the PRC may render you unable to enforce a judgment against our assets or the assets of our directors and officers. For more information regarding the relevant laws of the Cayman Islands and China, see “Enforceability of Civil Liabilities.”

Since we are a Cayman Islands company, the rights of our shareholders may be more limited than those of shareholders of a company organized in the United States.

Under the laws of some jurisdictions in the United States, majority and controlling shareholders generally have certain fiduciary responsibilities to the minority shareholders. Shareholder action must be taken in good faith, and actions by controlling shareholders which are obviously unreasonable may be declared null and void. Cayman Islands law protecting the interests of minority shareholders may not be as protective in all circumstances as the law protecting minority shareholders in some U.S. jurisdictions. In addition, the circumstances in which a shareholder of a Cayman Islands company may sue the company derivatively, and the procedures and defenses that may be available to the company, may result in the rights of shareholders of a Cayman Islands company being more limited than those of shareholders of a company organized in the U.S.

Furthermore, our directors have the power to take certain actions without shareholder approval which would require shareholder approval under the laws of most U.S. jurisdictions. The directors of a Cayman Islands company, subject in certain cases to court approval but without shareholder approval, may implement a reorganization, merger or consolidation, or the sale of any assets, property, part of the business, or securities of the company.

 

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You might not receive distributions on our common shares, or any value for them at all, if it is unlawful or impracticable for us to make them available to you.

The depositary of the ADSs has agreed to pay you the cash dividends or other distributions it or the custodian for the ADSs receives on our common shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of our common shares your ADSs represent. However, the depositary is not responsible if it is unlawful or impracticable to make a distribution available to any holders of ADSs. For example, it would be unlawful to make a distribution to a holder of ADSs if it consists of securities that require registration under the Securities Act but that are not properly registered or distributed pursuant to an applicable exemption from registration. The depositary is not responsible for making a distribution available to any holders of ADSs if any government approval or registration is required for such distribution. We have no obligation to take any other action to permit the distribution of the ADSs, common shares, rights or anything else to holders of the ADSs. This means that you might not receive the distributions we make on our common shares or any value for them if it is unlawful or impracticable for us to make them available to you.

There can be no assurance that we will not be a passive foreign investment company, or PFIC, for any taxable year, which could result in adverse U.S. federal income tax consequences to U.S. holders of ADSs or Class A common shares.

A non-U.S. corporation will be a PFIC for any taxable year if either (i) at least 75% of its gross income is passive income or (ii) at least 50% of the average quarterly value of its assets is attributable to assets that produce or are held for the production of passive income. Passive income generally includes dividends, interest, rents, royalties and certain gains.

Based upon the nature of our business and estimates of the valuation of our assets, including goodwill, which is based, in part, on the expected price of the ADSs in the offering, we do not expect to be a PFIC for our current taxable year or in the foreseeable future. However, it is not entirely clear how the contractual arrangements between our wholly-owned subsidiaries, our affiliated PRC entities and the shareholders of our affiliated PRC entities will be treated for purposes of the PFIC rules. Because the treatment of the contractual arrangements is not entirely clear, because we expect to hold following this offering a substantial amount of cash and other passive assets, and because the determination of whether we are a PFIC will depend on the character of our income and assets and the value of our assets from time to time, which may be based in part on the market price of our ADSs, which is likely to fluctuate after this offering, we may be a PFIC for our current taxable year or any future taxable year. If we were a PFIC for any taxable year during which a U.S. person owned an ADS or a Class A common share, or the prior taxable year, certain adverse U.S. federal income tax consequences could apply to the U.S. person. See “Taxation — United States Federal Income Tax Considerations — Passive Foreign Investment Company Rules.”

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to us. The forward-looking statements are contained principally in, but not limited to, the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Our Industry” and “Business.” These statements relate to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Forward-looking statements include, but are not limited to, statements about:

 

   

our anticipated growth strategies, including our plan to pursue selective acquisitions or strategic alliances;

 

   

our future business development, results of operations and financial condition;

 

   

our ability to maintain and strengthen our position as the leading preventive healthcare service company in China;

 

   

expected changes in our revenues and certain cost or expense items;

 

   

competition from other preventive healthcare service providers and our ability to expand our customer base;

 

   

our ability to expand and diversify our revenue source;

 

   

trends and competition in the healthcare industry in China;

 

   

the PRC government policies relating to the preventive healthcare service providers; and

 

   

general economic and business conditions in China and other countries or regions in which we operate.

This prospectus contains third-party data relating to the healthcare industry in China that includes projections based on a number of assumptions. Furthermore, if any one or more of the assumptions underlying the market data turns out to be incorrect, actual results may differ from the projections based on these assumptions.

In some cases, you can identify forward-looking statements by terms such as “may,” “could,” “will,” “should,” “would,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “project” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions. You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which are, in some cases, beyond our control and which could materially affect results. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under the heading “Risk Factors” and elsewhere in this prospectus. If one or more of these risks or uncertainties occur, or if our underlying assumptions prove to be incorrect, actual events or results may vary significantly from those implied or projected by the forward-looking statements. No forward-looking statement is a guarantee of future performance.

The forward-looking statements made in this prospectus relate only to events or information as of the date on which the statements are made in this prospectus. Although we will become a public company after this offering and have ongoing disclosure obligations under United States federal securities laws, we do not intend to update or otherwise revise the forward-looking statements in this prospectus, whether as a result of new information, future events or otherwise.

 

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OUR HISTORY AND CORPORATE STRUCTURE

Our History

In December 2003, ShanghaiMed Healthcare, Inc. was incorporated in the British Virgin Islands and its name was changed to iKang Guobin Healthcare Group, Inc., or iKang Guobin, in February 2011. In February 2004, Beijing iKang was incorporated in China as a wholly-owned subsidiary of iKang Guobin, to commence the operations in health management consulting services in China.

From 2004 to 2006, we acquired or established the following entities to ramp up our preventive healthcare services in China:

 

   

In September 2004, Mr. Ligang Zhang, our founder, chairman and chief executive officer, and Mr. Wenchang Lu, established Beijing iKang Online Technology Co., Ltd., or iKang Online. Beijing iKang entered into a series of contractual arrangements with iKang Online and its shareholders, through which we gained effective control over the operations of iKang Online.

 

   

In December 2004, we established Shanghai iKang Co., Ltd., or Shanghai iKang and currently hold a 100% equity interest in Shanghai iKang.

 

   

In February 2005, Mr. Ligang Zhang and Mr. Wenchang Lu acquired a 100% equity interest in Beijing iKang Guobin Health Technology Co., Ltd. (formerly known as Beijing Renbang Huide Technology Development Co., Ltd.), or iKang Technology. Beijing iKang entered into a series of contractual arrangements with iKang Technology and its shareholders, through which we gained effective control over the operations of iKang Technology.

 

   

In April 2006, our company and Wisdom Power International Limited established iKang Zhejiang, Inc., or iKang Zhejiang BVI, in the British Virgin Islands, in which we currently hold a 72.58% equity interest. In July 2006, iKang Zhejiang BVI incorporated a wholly-owned subsidiary, Zhejiang iKang, in China.

 

   

In October 2006, our company and Mr. Ligang Zhang acquired a 100% equity interest in Bayley & Jackson (China) Medical Services Limited, an entity incorporated in Hong Kong. As a result of this transaction, we eventually acquired a 100% equity interest in Beijing Bayley & Jackson Clinic Ltd., or iKang Beijing Ritan.

 

   

In July 2006, Mr. Ligang Zhang and Mr. Yongjin Wang, our former employee, acquired a 100% equity interest in Shenzhen iKang Co., Ltd. (formerly known as Shenzhen New Health Technology Development Co., Ltd.), or Shenzhen iKang.

 

   

In December 2006, Mr. Ligang Zhang acquired a 100% equity interest in Yalong Daoyi. Beijing iKang entered into a series of contractual arrangements with Yalong Daoyi and its shareholder, through which we gained effective control over the operations of Yalong Daoyi.

In April 2007, Beijing iKang entered into a series of agreements with the shareholders of Shanghai iKang Guobin Holding Co., Ltd. (formerly known as Shanghai iKang Guobin Group Co., Ltd. and Shanghai Guobin Medical Holding Co., Ltd.), or iKang Holding, in connection with a business combination. As a result of this transaction, we acquired a 65% equity interest in Shanghai Guobin Medical Center Co., Ltd., 60% equity interest in Shanghai Wangzu Guobin Medical Center Co., Ltd., 100% equity interest in Shanghai iKang Guobin Mingmen Clinic Co., Ltd. and 100% equity interest in Guangzhou iKang Guobin Health Checkup Co., Ltd. In 2007 and 2008, Beijing iKang entered into a series of contractual arrangements with iKang Holding and iKang Holding’s shareholders through which Beijing iKang gained effective control over the operations of iKang Holding.

From March 2008 to June 2010, Mr. Ligang Zhang, Mr. Wenchang Lu and Mr. Yongjin Wang transferred their respective equity interests in iKang Online, iKang Technology, Shenzhen iKang and Yalong Daoyi to iKang Holding. Thereafter, we started to provide integrated preventive healthcare services through iKang Holding, its affiliated PRC entity, and iKang Holding’s subsidiaries.

 

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Since our acquisition of iKang Holding in 2007, in an effort to further expand our geographic coverage in China, iKang Holding and its subsidiaries have acquired or established the following entities:

 

   

In September 2007, Shenzhen iKang acquired a 55.67% equity interest in Shenzhen iKang Guobin Hospital Management Co., Ltd. (formerly known as Shenzhen Zelu Hospital Management Co., Ltd.), or Shenzhen Hospital Management, which currently owns a 100% equity interest in Shenzhen Puji Clinic Co. Ltd., or iKang Shenzhen Nanshan. In September 2011, Shenzhen iKang acquired an additional 10% equity interest in Shenzhen Hospital Management and currently holds a 65.67% equity in Shenzhen Hospital Management.

 

   

In December 2007, iKang Holding established Chengdu iKang Guobin Blue Coast Health Management Co., Ltd., or Chengdu Blue Coast, and held a 60% equity interest in it. In May 2008, iKang Holding further acquired the remaining 40% equity interest in Chengdu Blue Coast.

 

   

From December 2007 to May 2010, through a series of transactions, iKang Online acquired a 100% equity interest in Beijing iKang Guobin Lidu Clinic Co., Ltd. (formerly known as Beijing Bodywork Clinic Co., Ltd.), or iKang Beijing Lidu.

 

   

In January 2008, iKang Holding acquired a 60% equity interest in Nanjing Joycome Clinic Co., Ltd., or iKang Nanjing Xinjiekou. In September 2008, iKang Holding became the sole shareholder of iKang Nanjing Xinjiekou.

 

   

In March 2008, Shenzhen iKang acquired a 100% equity interest in Shenzhen iKang Guobin Clinic Co., Ltd. (formerly known as Shenzhen Shenyuan Clinic), or iKang Shenzhen Luohu.

 

   

In September 2008, iKang Online established Beijing iKang Guobin Jianwai Clinic Co., Ltd. (formerly known as Beijing Aibin Clinic Co., Ltd.), or iKang Beijing Jianguomen, and currently holds a 100% equity interest in it.

 

   

In September 2008, iKang Online established Beijing iKang Guobin Zhongguan Clinic Co., Ltd. (formerly known as Beijing Kangbin Clinic Co., Ltd.), or iKang Beijing Zhongguancun, and currently holds a 100% equity interest in it.

 

   

In December 2008, iKang Holding established Shanghai iKang Guobin Renren Clinic Co., Ltd. (formerly known as Shanghai Renren Guobin Clinic Co., Ltd.), or iKang Shanghai Yangpu, and currently holds a 100% equity interest in it.

 

   

In December 2008, iKang Online acquired a 100% equity interest in Beijing iKang Guobin Zhengqingyuan Clinic Co., Ltd. (formerly known as Beijing Zhengqingyuan Clinic Co., Ltd.), or iKang Beijing Kunming Lake, and iKang Guobin Jiuxianqiao Clinic Co., Ltd. (formerly known as Beijing Zhengqingyuan Dongrun Clinic Co., Ltd.), or iKang Beijing Yansha East, respectively.

 

   

In January 2009, Chengdu Blue Coast established Chengdu iKang Guobin Health Examination Hospital Co., Ltd. (formerly known as iKang Guobin Blue Coast Clinic Co., Ltd.), or iKang Chengdu Waishuangnan, and transferred its 100% equity interest to iKang Holding in December 2009.

 

   

In January 2010, iKang Holding acquired a 83% equity interest in Shanghai iKang Guobin Blue Cross Clinic Co., Ltd. (formerly known as Shanghai Blue Cross Taolin Clinic Co., Ltd.), or iKang Shanghai Lujiazui. In June 2013, iKang Holding became the sole shareholder of iKang Shanghai Lujiazui.

 

   

In February 2010, iKang Holding acquired a 71.15% equity interest in Shanghai Wenzhong. Shanghai Wenzhong’s business license has been revoked.

 

   

In August 2010, iKang Online established Beijing iKang Guobin Clinic Co., Ltd., or iKang Beijing Xuanwumen, and currently holds a 100% equity interest in it.

 

   

In January 2011, iKang Holding acquired a 100% equity interest in Nanjing Zhongnan Clinic Co., Ltd. (which was renamed Nanjing iKang Guobin Clinic Co., Ltd.), or iKang Nanjing Gulou, and transferred its 60% equity in iKang Nanjing Gulou to iKang Nanjing Xinjiekou in May 2011.

 

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In January 2011, Shenzhen iKang acquired the assets and operations of Shenzhen Xinglin Clinic, or iKang Shenzhen Futian.

 

   

In April 2011, iKang Holding established Fujian iKang Guobin Health Management Co., Ltd., or Fujian iKang, and it currently holds a 71.43% equity interest in it.

 

   

In August 2011, iKang Holding acquired a 35% equity interest in Shanghai Guobin Medical Center Co., Ltd., or iKang Shanghai Xikang Road, from Mr. Boquan He, a director of our company, and currently holds a 100% equity interest in iKang Shanghai Xikang Road.

 

   

In November 2011, Fujian iKang established Fuzhou Gulou iKang Guobin General Clinic Co., Ltd.

 

   

In January 2012, iKang Holding established Shanghai Fukang Clinic Co., Ltd. which was renamed Shanghai iKang Guobin Fukang Clinic Co., Ltd., or iKang Shanghai Yan’an West Road, in January 2013.

 

   

In January 2012, iKang Holding and iKang Online jointly established Beijing iKang Guobin Xinei Clinic Co., Ltd., or iKang Beijing Xinei, in which iKang Holding and iKang Online each holds 10% and 90% equity interest, respectively.

 

   

In January 2012, iKang Holding acquired a 100% equity interest in Shanghai Yipin Clinic Co., Ltd., or iKang Shanghai Jing’an.

 

   

In January 2012, iKang Holding acquired a 100% equity interest in Shanghai Zhonghuan Yipin Clinic Co., Ltd., or iKang Shanghai Zhonghuan.

 

   

In May 2012, iKang Holding established Shanghai Zhongxin Clinic Co., Ltd. which was renamed Shanghai iKang Guobin Waizhitan Clinic Co., Ltd., or iKang Shanghai Yan’an East Road.

 

   

In August 2012, iKang Holding acquired a 100% equity interest in Shanghai Jianwei Clinic Co., Ltd., or iKang Shanghai Jianwei.

 

   

In September 2012, iKang Holding and Yalong Daoyi jointly established Hangzhou iKang Guobin Wenhui Medical Clinic Co., Ltd, or iKang Hangzhou Wenhui, in which iKang Holding and Yalong Daoyi each holds 90% and 10% equity interest, respectively.

 

   

In October 2012, iKang Holding and iKang Online jointly established Tianjin Heping District Aibin Clinic Co., Ltd., or iKang Tianjin Heping, in which iKang Holding and iKang Online each holds 10% and 90% equity interest, respectively.

 

   

In November 2012, iKang Holding acquired Nanguan District Jiachang General Clinic, or Jiachang Clinic, and Jilin Province Jiachang Health Check Research Institute, and converted Jiachang Clinic into a limited liability company named Changchun iKang Guobin Jiachang General Clinic Co., Ltd., or iKang Changchun, in which iKang Holding and iKang Online each holds 90% and 10% equity interst, repectively.

 

   

In November 2012, iKang Holding and iKang Online jointly established Suzhou Aibin Clinic Co., Ltd., or iKang Suzhou, in which iKang Holding and iKang Online each holds 90% and 10% equity interest, respectively.

 

   

In December 2012, iKang Holding and iKang Online jointly established Chongqing Aibin Clinic Co., Ltd., or iKang Chongqing, in which iKang Holding and iKang Online each holds 90% and 10% equity interest, respectively.

 

   

In December 2012, iKang Holding and iKang Online jointly established Chengdu Jinjiang iKang Guobin Hongzhaobi Health Examination General Clinic Co., Ltd., or iKang Chengdu Jinjiang, in which iKang Holding and iKang Online each holds 90% and 10% equity interest, respectively.

 

   

In December 2012, iKang Holding and iKang Online jointly acquired Guangzhou Wokang Medical Clinic, or iKang Guangzhou Wokang, and converted it into a limited partnership in which iKang Holding and iKang Online each holds 1% and 99% equity interest, respectively.

 

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In March 2013, iKang Holding acquired 100% equity interest in Shenzhen Kefa Clinic, or iKang Shenzhen Kefa.

 

   

In September 2013, iKang Holding and Shanghai Puya Investment Management Co., Ltd. jointly established Shanghai iKang Jianwei Health Management Co., Ltd., in which iKang Holding and Shanghai Puya Investment Management Co., Ltd. each holds 65% and 35% equity interest, respectively.

 

   

In September 2013, iKang Holding acquired 100% equity interest in both Nanjing Aoyang TCM Clinic Co., Ltd., or iKang Nanjing Aoyang, and Nanjing Aoyang Shunkang Health Information Consutancy Co., Ltd.

 

   

In November 2013, iKang Holding and iKang Online jointly established Beijing iKang Jun’an Clinic Co., Ltd. or iKang Beijing Jun’an, in which iKang Holding and iKang Online each holds 10% and 90% equity interest, respectively.

 

   

In December 2013, iKang Holding and iKang Online jointly established Beijing iKang Guobin Yayun Clinic Co., Ltd. or iKang Beijing Yayun, in which iKang Holding and iKang Online each holds 10% and 90% equity interest, respectively.

 

   

In December 2013, iKang Holding established Jiangyin iKang Guobin Clinic Co., Ltd. or iKang Jiangyin, in which iKang Holding holds 100% equity interest.

 

   

In December 2013, iKang Holding acquired Zhejiang Huzhou Ailikang Investment Management Co. Ltd., which holds 100% equity interest in Hangzhou Aibo Huagang Clinic Co. Ltd., or Hangzhou Aibo.

iKang Holding and its subsidiaries have completed the PRC approvals and registrations required for the establishment or acquisitions of such medical centers.

In September 2010, iKang Holding and Yalong Daoyi established iKang Hangzhou Xixi, with a 80% and 20% equity interest, respectively. In January 2011, Zhejiang iKang entered into a series of contractual arrangements with iKang Hangzhou Xixi and the shareholders of iKang Hangzhou Xixi, iKang Holding and Yalong Daoyi, through which Zhejiang iKang gained effective control over the operations of iKang Hangzhou Xixi.

In July 2013, our company acquired a 100% equity interest in Yuanhua WFOE, which entered into a series of contractual arrangements with Yuanhua Information and Yuanhua Information’s shareholders through which Yuanhua WFOE gained effective control over the operations of Yuanhua Information. Yuanhua Information and Shanghai Yuanhua Clinic Co., Ltd., a subsidiary of Yuanhua Information, provide medical examination related services in China. Over the years Yuanhua WFOE has cultivated a brand name as a high end medical service provider and a loyal and stable client base. After the acquisition, while Yuanhua WFOE will leverage iKang’s operational platform and resources, it is continuing to operate under its own brand and management.

In April 2013, Mr. Jingfeng Pan and Mr. Rui Ma established Beijing Jiandatong, holding a 80% and 20% equity interest, respectively. In December 2013, Mr. Jinfeng Pan transferred the 80% equity interest in Beijing Jiandatong to Mr. Haiqing Hu. In December 2013, Beijing iKang entered into a series of contractual arrangements with Beijing Jiandatong and Mr. Haiqing Hu through which Beijing iKang gained effective control over the operations of Beijing Jiandatong.

In January 2014, iKang Guobin acquired a 80% equity interest in MediFast (Hong Kong) Limited which provides medical examination, vaccination and insurance physical examination services.

Our company, iKang Healthcare Group, Inc. (formerly known as China iKang Healthcare, Inc.), was incorporated in connection with this offering in May 2011 as a limited liability company in the Cayman Islands. In March 2014, iKang Guobin became the wholly owned subsidiary of our company through a share exchange through which we acquired all the issued and outstanding shares of iKang Guobin, and issued shares to the shareholders of iKang Guobin.

 

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Our Corporate Structure

Foreign ownership of healthcare and Internet-based businesses in China is subject to significant restrictions under current PRC laws and regulations. The PRC government regulates these industries through strict business licensing requirements and other government regulations. These laws and regulations also include limitations on foreign ownership in PRC companies that operate healthcare and Internet-based businesses. Specifically, foreign investment in Internet-based businesses is categorized as “restricted” and foreign investors are not allowed to own more than a 50% equity interest in an entity conducting an Internet-based business pursuant to the Administrative Rules for Foreign Investment in Telecommunication Enterprises. Also, foreign investment in the healthcare industry was categorized as “restricted” and foreign investors were not allowed to own more than a 70% equity interest in an entity conducting a healthcare-based business pursuant to the Interim Measures for Administration of Sino-foreign Joint Venture and Cooperative Medical Institutions which took effect in July 2000. In addition, the Interim Measures for Administration of Sino-foreign Joint Venture and Cooperative Medical Institutions also set certain qualifications requirements for foreign investors, such as requiring such investors’ possession of and investment and operation experience in the medical sector. Although a December 2011 amendment to the Catalog of Industries for Guiding Foreign Investment recategorized foreign investment in the healthcare sector from “restricted” to “permitted” and various other subsequent regulations and rules state that restrictions on foreign investment in the healthcare sector should be lifted, restrictions on foreign investment in the healthcare sector still exist in practice, and the amendments have not been implemented at the provincial or municipal level in many cases and therefore many local governments continue to follow the previous rules and impose a 70% foreign ownership limit and foreign investor qualification requirements when approving and registering medical institutions. As a result, as of the date of this prospectus, our company’s investments in its operating companies in the healthcare sector continue to be made in accordance with the previous rules governing foreign investment in the healthcare industry. See “Regulation — Regulations Relating to Foreign Investment in the Value-Added Telecommunications Industry,” and “Regulation — Regulations Relating to Foreign Investment in Our Industry.”

To comply with PRC laws and regulations, we conduct our operations in China mainly through a series of contractual arrangements entered into (i) among Beijing iKang, iKang Holding and iKang Holding’s shareholders, (ii) among Zhejiang iKang, iKang Hangzhou Xixi and iKang Hangzhou Xixi’s shareholders, (iii) among Yuanhua WFOE, Yuanhua Information and Yuanhua Information’s shareholders, and (iv) among Beijing iKang, Beijing Jiandatong and Mr. Haiqing Hu, one of Beijing Jiandatong’s shareholders who holds a 80% equity interest in Beijing Jiandatong including exclusive business cooperation agreements, share pledge agreements, exclusive call option agreements and powers of attorney, through which Beijing iKang, Zhejiang iKang and Yuanhua WFOE exercise effective control over the operations of iKang Holding, iKang Hangzhou Xixi, Yuanhua Information, Beijing Jiandatong and their subsidiaries, respectively, and receive economic benefits generated from shareholders’ equity interests in these entities.

The affiliated PRC entities contributed an aggregate of 83.9%, 86.0%, 84.8% and 86.0% of our consolidated net revenues for the years ended March 31, 2011, 2012 and 2013 and for the nine months ended December 31, 2013, respectively. Our operations not conducted through contractual arrangements with the affiliated PRC entities primarily consist of high-end health examination services and outpatient services to non-PRC citizens. As of March 31, 2012 and 2013 and December 31, 2013, the affiliated PRC entities accounted for an aggregate of 82.1%, 55.1% and 50.2%, respectively, of our consolidated total assets, and 83.6%, 77.9% and 81.0%, respectively, of our consolidated total liabilities. The assets not associated with the affiliated PRC entities primarily consist of cash and cash equivalents, account receivable and prepaid expenses and other current assets.

 

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The following diagram illustrates our corporate structure immediately prior to this offering.

 

LOGO

 

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(1) Shanghai iKang Guobin Holding Co., Ltd., or iKang Holding, is our consolidated affiliated entity established in China, and each of Mr. Ligang Zhang and Mr. Boquan He holds 50% of the equity interest in iKang Holding. Mr. Ligang Zhang and Mr. Boquan He are directors of our company.
(2) Hangzhou iKang Guobin Clinic Co., Ltd., or iKang Hangzhou Xixi, is our consolidated affiliated entity established in China, and iKang Holding and Yalong Daoyi hold 80% and 20% of the equity interest in iKang Hangzhou Xixi, respectively.
(3) Shanghai Yuanhua Information Technology Co., Ltd., or Yuanhua Information, is our consolidated affiliated entity established in China, and Mr. Haiqing Hu and Mr. Lei Zhao hold 80% and 20% of the equity interest in Yuanhua Information, respectively.
(4) Jiandatong Health Technology (Beijing) Co., Ltd., or Beijing Jiandatong, is our consolidated affiliated entity established in China, and Mr. Haiqing Hu and Mr. Rui Ma hold 80% and 20% of the equity interest in Beijing Jiandatong, respectively.
(5) Shanghai Wenzhong Clinic Co., Ltd.’s two subsidiaries, Shanghai Wen-chao Manage Co., Ltd. and Shanghai Guoda Wenzhong Medical Co., Ltd., are in the process of being liquidated.

The following is a summary of the key agreements currently in effect among our PRC subsidiaries (Beijing iKang, Zhejiang iKang and Yuanhua WFOE), our affiliated PRC entities (iKang Holding, iKang Hangzhou Xixi, Yuanhua Information and Beijing Jiandatong) and the respective shareholders of our affiliated PRC entities that transfer the economic benefits of our affiliated PRC entities to us:

 

   

Exclusive Business Cooperation Agreement. Each of our PRC subsidiaries referred to above has entered into an exclusive business cooperation agreement with the relevant affiliated PRC entity. Under each agreement, the affiliated PRC entity agrees to engage the PRC subsidiary as its exclusive provider of technology and consulting services in connection with investments in healthcare, medicine and medical equipment. Each of iKang Holding, iKang Hangzhou Xixi and Yuanhua Information will pay to the PRC subsidiary service and consulting fees determined by Beijing iKang, Zhejiang iKang and Yuanhua WFOE, respectively, up to the entire net profit of the relevant affiliated PRC entity. Beijing Jiandatong will pay to Beijing iKang service and consulting fees determined by Beijing iKang, up to the 80% of Beijing Jiandatong’s net profit. The remaining 20% of Beijing Jiandatong’s net profit is obligated to Mr. Rui Ma, the other shareholder of Beijing Jiandatong who is not a person designated by us. Our PRC subsidiary will exclusively own any intellectual property arising from the performance of the agreement. Each agreement is for a term of 10 years. The agreement between Beijing iKang and iKang Holding will expire on April 26, 2017, the agreement between Zhejiang iKang and iKang Hangzhou Xixi will expire on January 11, 2021, the agreement between Yuanhua WFOE and Yuanhua Information will expire on July 24, 2023, and the agreement between Beijing iKang and Beijing Jiandatong will expire on December 29, 2023, and all are renewable upon the relevant PRC subsidiary’s request. Our PRC subsidiary may terminate the agreement at any time by providing 30 days advance written notice to the affiliated PRC entity. The affiliated PRC entity may not terminate the agreement.

 

   

Share Pledge Agreement. The shareholders of each of iKang Holding, iKang Hangzhou Xixi and Yuanhua Information entered into a share pledge agreement with the relevant PRC subsidiary. Mr. Haiqing Hu, one of Beijing Jiandatong’s shareholders who holds a 80% equity interest in Beijing Jiandatong, entered into a share pledge agreement with Beijing iKang and Beijing Jiandatong. The remaining 20% equity interest in Beijing Jiandatong is held by Mr. Rui Ma, who is not a shareholder designated by us, and is therefore not pledged for the benefit of Beijing iKang. Under the share pledge agreement, the shareholders, who entered into the share pledge agreements have pledged all of their equity interests in the affiliated PRC entity to the relevant PRC subsidiary as collateral for all of the affiliated PRC entity’s payments due to the PRC subsidiary and to secure performance of all obligations of the affiliated PRC entity and its shareholders under the above exclusive business cooperation agreement. The pledge shall remain effective until all obligations secured under such pledge have been fully performed. The dividend or profit distribution that the affiliated PRC entity declares or makes during the term of the pledge shall be directly paid to the PRC subsidiary. Without the PRC subsidiary’s prior written consent, neither shareholder, who entered into the share pledge agreements may transfer any equity interests in the respective affiliated PRC entities. If any event of default as provided for therein occurs, including non-payment under the exclusive business cooperation agreement the PRC subsidiary, as the pledgee, will be entitled to require the shareholders, who entered

 

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into the share pledge agreements of the affiliated PRC entity, who entered into the share pledge agreements to dispose of the pledged equity interests.

 

   

Power of Attorney. Each shareholder of iKang Holding, iKang Hangzhou Xixi and Yuanhua Information and Mr. Haiqing Hu, who holds a 80% equity interest in Beijing Jiandatong executed an irrevocable power of attorney to appoint the PRC subsidiary as his or its attorney-in-fact to act on his or its behalf on all matters pertaining to the affiliated PRC entity and to exercise all of his or its rights as a shareholder of the affiliated PRC entity, including the right to attend shareholders meetings, to exercise voting rights, to receive any dividend and profit distribution to shareholders and to appoint directors, a general manager and other senior management of the affiliated PRC entity. The power of attorney is irrevocable and continually valid as long as the principal is the shareholder of the affiliated PRC entity.

 

   

Exclusive Call Option Agreement. Each of iKang Holding, iKang Hangzhou Xixi and Yuanhua Information and their shareholders, as well as Beijing Jiandatong and Mr. Haiqing Hu, entered into an exclusive call option agreement with the relevant PRC subsidiary. Pursuant to the agreement, the PRC subsidiary and any third party designated by it have the exclusive right to purchase from the shareholders of the affiliated PRC entity all or any part of their equity interests in the affiliated PRC entity at a purchase price equal to the lowest price permissible by the then-applicable PRC laws and regulations. The shareholders of the affiliated PRC entity shall immediately transfer the purchase price they receive from the PRC subsidiary to the affiliated PRC entity when the PRC subsidiary exercises the call option. Moreover, neither the affiliated PRC entity nor its shareholders may take actions that could materially affect the affiliated PRC entity’s assets, liabilities, operation, equity and other legal rights without the prior written approval of the PRC subsidiary, including, without limitation, sale, assignment, mortgage or disposition of, or encumbrances on, the affiliated PRC entity’s assets, business or revenues; creation, assumption, guarantee or incurrence of any indebtedness except those incurred not in a form of borrowing during the ordinary business; merger or consolidation; acquisition of and investment in any third-party entities; entering into other material contracts and declaration and distribution of dividend and profit. Each agreement is for an initial term of 10 years. The agreement among Beijing iKang, iKang Holding and iKang Holding’s shareholders will expire on March 16, 2018, the agreement among Zhejiang iKang, iKang Hangzhou Xixi and iKang Hangzhou Xixi’s shareholders will expire on January 11, 2021, the agreement among Yuanhua WFOE, Yuanhua Information and Yuanhua Information’s shareholders will expire on July 24, 2023, and the agreement among Beijing iKang, Beijing Jiandatong and Mr. Haiqing Hu will expire on December 29, 2023. All these agreements are renewable upon the relevant PRC subsidiary’s request.

 

   

Spousal Consent Letters. Spouses of Mr. Ligang Zhang and Mr. Boquan He, the shareholders of iKang Holding, executed spousal consent letters, acknowledging that a certain percentage of the equity interest in the affiliated PRC entities held by their spouses will be disposed of pursuant to the above contractual arrangements and waiving their rights and benefits over such equity interests as spouses of shareholders of iKang Holding.

As a result of these contractual arrangements and various operational agreements, we are considered the primary beneficiary of our affiliated PRC entities and their respective subsidiaries, and accordingly, we consolidate the results of operations of our affiliated PRC entities and their respective subsidiaries in our financial statements.

In the opinion of our PRC legal counsel, King & Wood Mallesons Lawyers, the ownership structure and the contractual arrangements described above are not in violation of current PRC laws, rules and regulations and each contract under the contractual arrangements is valid, binding and enforceable under current PRC laws. However, our PRC legal counsel has also advised us that there are substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations; accordingly, PRC regulatory authorities may ultimately take a view that is contrary to the opinion of King & Wood Mallesons Lawyers. See “Risk Factors — Risks Related to Our Corporate Structure.”

 

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USE OF PROCEEDS

Based upon an assumed initial offering price of US$             per ADS (the mid-point of the estimated initial public offering price range shown on the front cover of this prospectus), we estimate that we will receive net proceeds from this offering of approximately US$             million after deducting underwriting discounts and commissions and the estimated offering expenses payable by us. If the underwriters exercise in full their option to purchase additional ADSs, we will receive approximately US$             million. A US$1.00 increase (decrease) in the assumed initial offering price would increase (decrease) the net proceeds to us from this offering by US$             million after deducting underwriting discounts and commissions and the estimated offering expenses payable by us.

We intend to use the net proceeds we receive from this offering primarily for the following purposes:

 

   

approximately US$              million to finance potential strategic acquisitions and construction of new medical centers in China;

 

   

approximately US$              million to finance potential strategic acquisitions and construction of dental clinics in China;

 

   

approximately US$              million to upgrade our information technology systems; and

 

   

approximately US$              million to fund working capital as well as for other general corporate purposes.

In using the proceeds of this offering, as an offshore holding company, under PRC laws and regulations, we are permitted to provide funding to our PRC subsidiaries only through loans or capital contributions. Subject to satisfaction of applicable government registration and approval requirements, we may extend inter-company loans to our PRC subsidiaries or make additional capital contributions to our PRC subsidiaries to fund their capital expenditures or working capital. We intend to invest the proceeds of this offering into our PRC subsidiaries and thereafter convert such proceeds into Renminbi promptly upon completion of relevant PRC government registration or receipt of the relevant approval. If we provide funding to our PRC subsidiaries through capital contributions or loans, we will need to increase our PRC subsidiaries’ approved registered capital and total investment amount, which requires approval from the MOFCOM or its local branches. This approval process typically takes 30 to 90 days, and sometimes longer, from the time the MOFCOM or its local branches receive all the required application documents. If we provide funding to a PRC subsidiary through loans, we will also need to register such loans with SAFE or its local branches, which usually requires no more than 20 working days from the date of receipt of all the required application documents by SAFE or its local branches. We cannot assure you that we will be able to complete these government registrations or obtain the relevant approvals on a timely basis, if at all. See “Risk Factors — Risks Related to Doing Business in China — PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using our net proceeds from this offering to make loans or additional capital contributions to our PRC operating subsidiaries.”

Pending use of the net proceeds, we intend to invest our net proceeds in short-term, interest-bearing debt instruments or bank deposits.

The foregoing represents our current intentions with respect of the use and allocation of the net proceeds to us from this offering based upon our present plans and business conditions, but our management will have significant flexibility and discretion in applying the net proceeds of this offering. The occurrence of unforeseen events or changed business conditions may result in application of our proceeds from this offering in a manner other than as described in this prospectus.

 

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DIVIDEND POLICY

We have never declared or paid dividends on our common shares, and we do not have any plan to declare or pay any dividends on our common shares in the near future. We currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.

We are a holding company incorporated in the Cayman Islands. PRC regulations may restrict the ability of our PRC subsidiaries to pay dividends to us. See “Regulation — Regulations Relating to Dividend Distribution” and “Risk Factors—Risks Related to Doing Business in China — Our holding company structure may restrict our ability to receive dividends or other payments from our PRC subsidiaries and our affiliated PRC entities, which could restrict our ability to act in response to changing market conditions and to satisfy our liquidity requirements.”

Our board of directors has complete discretion in deciding whether to distribute dividends. Even if our board of directors decides to pay dividends, the timing, amount and form of future dividends, if any, will depend on, among other things, our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiary, our financial condition, contractual restrictions and other factors deemed relevant by our board of directors.

If we pay any dividends, our ADS holders will be entitled to such dividends to the same extent as holders of our Class A common shares, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. See “Description of American Depositary Shares.” Cash dividends on our Class A common shares, if any, will be paid in U.S. dollars.

 

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CAPITALIZATION

The following table sets forth our total capitalization as of December 31, 2013:

 

   

on an actual basis;

 

   

on a pro forma basis to reflect the conversion of all outstanding preferred shares and              of Class B common shares into                  Class A common shares on a one-for-one basis;

 

   

on a pro forma as-adjusted basis to reflect the above and the issuance and sale of              Class A common shares in the form of ADSs by us in this offering, assuming an initial public offering price of US$             per ADS, the mid-point of the estimated range of the initial public offering price, after deducting estimated underwriting discounts and commissions and offering expenses payable by us and assuming no exercise of the underwriters’ option to purchase additional ADSs.

The pro forma as adjusted information below is illustrative only and our capitalization following the closing of this offering is subject to adjustment based on the initial public offering price of our ADSs and other terms of this offering determined at pricing. You should read this table together with our consolidated financial statements and the related notes included elsewhere in this prospectus and the information under “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

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     As of December 31, 2013  
     Actual     Pro forma     Pro forma as
Adjusted
 
     US$     US$     US$  
     (in thousands)  

Convertible redeemable participating preferred shares

      

Series A convertible redeemable participating preferred shares ($0.01 par value; 1,094,668 shares authorized, issued and outstanding)

     6,496        —          —     

Series B convertible redeemable participating preferred shares ($0.01 par value; 686,368 shares authorized, issued and outstanding)

     6,512        —          —     

Series C-1 convertible redeemable participating preferred shares ($0.01 par value; 794,250 shares authorized, issued and outstanding)

     5,700        —          —     

Series C-2 convertible redeemable participating preferred shares ($0.01 par value; 126,286 shares authorized, issued and outstanding)

     1,709        —          —     

Series C-3 convertible redeemable participating preferred shares ($0.01 par value; 1,024,318 shares authorized, issued and outstanding)

     4,157        —          —     

Series D-1 convertible redeemable participating preferred shares ($0.01 par value; 3,488,864 shares authorized, issued and outstanding)

     29,750        —          —     

Series D-2 convertible redeemable participating preferred shares ($0.01 par value; 2,072,624 shares authorized, issued and outstanding)

     11,300        —          —     

Series E convertible redeemable participating preferred shares ($0.01 par value; 4,289,457 shares authorized, issued and outstanding)

     54,098        —          —     

Series F convertible redeemable participating preferred shares ($0.01 par value; 7,204,680 shares authorized, issued and outstanding)

     144,795        —          —     

Total convertible redeemable participating preferred shares

     264,517        —          —     

Equity:

      

Class A common shares, par value $0.01 per share, 37,648,485 shares authorized; 4,599,673 shares issued and outstanding as of the date of this prospectus; 25,381,188 shares issued and outstanding on a pro forma basis;              shares issued and outstanding on a pro forma as-adjusted basis

     45        253     

Class B common shares, par value $0.01 per share, 1,570,000 shares authorized, issued and outstanding as of the date of this prospectus

     16        16     

Additional paid-in capital(1)

     412        264,721     

Statutory reserve

     2,267        2,267     

Accumulated deficit

     (128,735     (128,735  

Accumulated other comprehensive income

     6,399        6,399     

Total iKang Guobin Healthcare Group, Inc. shareholders’ equity (deficit)

     (119,596     144,921     
  

 

 

   

 

 

   

 

 

 

Non-controlling interest

     1,772        1,772     
  

 

 

   

 

 

   

 

 

 

Total mezzanine equity and equity (deficit)

     146,693        146,693     
  

 

 

   

 

 

   

 

 

 

Total

     146,693        146,693     
  

 

 

   

 

 

   

 

 

 

 

(1) A US$1.00 increase (decrease) in the assumed initial public offering price of $             per ADS would increase (decrease) each of additional paid-in capital, total shareholders’ equity and total capitalization by US$             million on an as adjusted basis, after deducting the estimated underwriting discounts and commissions, estimated offering expenses and placement fee payable by us and assuming no exercise of the underwriters’ option to purchase additional ADSs.

 

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DILUTION

If you invest in our ADSs, your interest will be diluted to the extent of the difference between the initial public offering price per ADS and our net tangible book value per ADS after this offering. Dilution results from the fact that the initial public offering price per Class A common share is substantially in excess of the book value per Class A common share attributable to the existing shareholders for our presently outstanding Class A common shares and holders of our preferred shares which will automatically convert into our common shares upon the completion of this offering.

Our net tangible book value as of December 31, 2013 was approximately $94.8 million, or $3.5 per Class A common share as of that date, and $             per ADS. Net tangible book value represents the amount of our total consolidated assets, less the amount of our intangible assets, goodwill, total consolidated liabilities and preferred shares. Dilution is determined by subtracting net tangible book value per Class A common share, after giving effect to (1) the automatic conversion of all of our outstanding preferred shares into Class A common shares immediately upon the completion of this offering and (2) the issuance and sale by us of              Class A common shares in the form of ADSs in this offering at an assumed initial public offering price of $             per ADS (the midpoint of the estimated initial public offering price range shown on the front cover page of this prospectus) after deduction of the underwriting discounts and commissions and estimated offering expenses payable by us.

Without taking into account any other changes in net tangible book value after December 31, 2013, other than to give effect to (1) the automatic conversion of all of our outstanding preferred shares into Class A common shares immediately upon the completion of this offering and (2) the issuance and sale by us of              Class A common shares in the form of ADSs in this offering at an assumed initial public offering price of $             per ADS (the midpoint of the estimated initial public offering price range shown on the front cover page of this prospectus) after deduction of the underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of December 31, 2013 would have been $             million, or $             per outstanding Class A common share and $             per ADS. This represents an immediate increase in net tangible book value of $             per Class A common share and $            per ADS to the existing shareholders and an immediate dilution in net tangible book value of $             per Class A common share and $             per ADS to investors purchasing ADSs in this offering.

The following table illustrates such dilution:

 

     Per Common
Share
     Per ADS

Actual net tangible book value per share as of December 31, 2013

     15.4      

Pro forma net tangible book value per share after giving effect to the automatic conversion of              Class B common shares and all of our outstanding preferred shares into Class A common shares

     3.5      

Pro forma as adjusted net tangible book value per share after giving effect to (i) the automatic conversion of              Class B common shares and all of our outstanding preferred shares into Class A common shares and (ii) this offering

     

Assumed initial public offering price

     

Dilution in net tangible book value per share to new investors in the offering

     

The amount of dilution in net tangible book value to new investors in this offering set forth above is calculated by deducting (i) the pro forma net tangible book value after giving effect to the automatic conversion of our outstanding preferred shares from (ii) the pro forma net tangible book value after giving effect to the automatic conversion of our preferred shares and this offering.

 

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The following table summarizes, on a pro forma basis as of December 31, 2013, the differences between existing shareholders, including holders of our preferred shares, and the new investors with respect to the number of Class A common shares (in the form of ADSs or shares) purchased from us, the total consideration paid and the average price per Class A common share/ADS paid before deducting the underwriting discounts and commissions and estimated offering expenses. The total number of Class A common shares does not include Class A common shares underlying the ADSs issuable upon the exercise of the option to purchase additional ADSs granted to the underwriters.

 

     Class A Common Shares
Purchased
   Total
Consideration
   Average Price
per
Common Share

Equivalent
   Average Price
per
ADS Equivalent
     Number      Percent    Amount      Percent      

Existing shareholders

     26,951,188            104,385            

New investors

                 
  

 

 

    

 

  

 

 

    

 

     

Total

                 
  

 

 

    

 

  

 

 

    

 

     

A $1.00 increase (decrease) in the assumed public offering price of $             per ADS (the midpoint of the estimated initial public offering price range shown on the front cover page of this prospectus) would increase (decrease) our pro forma net tangible book value after giving effect to the offering by $             million, the pro forma net tangible book value per Class A common share and per ADS after giving effect to the automatic conversion of our outstanding preferred shares and this offering by $             per Class A common share and $             per ADS and the dilution in pro forma net tangible book value per Class A common share and per ADS to new investors in this offering by $             per Class A common share and $             per ADS, assuming no change to the number of ADSs offered by us as set forth on the front cover page of this prospectus, and after deducting underwriting discounts and commissions and other offering expenses.

The pro forma information discussed above is illustrative only. Our net tangible book value following the completion of this offering is subject to adjustment based on the actual initial public offering price of our ADSs and other terms of this offering determined at pricing.

The discussion and tables above also do not take into consideration any outstanding share options and issued but unvested Class A common shares. As of the date of this prospectus, there were              Class A common shares issuable upon exercise of outstanding share options at an exercise price that ranges from $             to $             per share, and there were              Class A common shares available for future issuance upon the exercise of future grants. As of the date of this prospectus, there were              issued but unvested Class A common shares. To the extent that any of these options are exercised and the unvested Class A common shares become vested, there will be further dilution to new investors.

 

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EXCHANGE RATE INFORMATION

Our business is primarily conducted in China and substantially all of our revenues and expenses are denominated in Renminbi. This prospectus contains translations of Renminbi amounts into U.S. dollars at specific rates solely for the convenience of the reader. We make no representation that any Renminbi or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or Renminbi, as the case may be, at any particular rate, or at all. The PRC government imposes controls over its foreign currency reserves in part through direct regulation of the conversion of Renminbi into foreign exchange and through restrictions on foreign trade. On February 21, 2014, the daily exchange rate reported by the Federal Reserve Board was RMB6.0912 to US$1.00.

The following table sets forth information concerning exchange rates between Renminbi and the U.S. dollar for the periods indicated. These rates are provided solely for your convenience and are not necessarily the exchange rates that we used in this prospectus or will use in the preparation of our periodic reports or any other information to be provided to you.

 

     Exchange Rate  

Period

   Period End      Average(1)      High      Low  
     (RMB per US$1.00)  

2008

     6.8225         6.9193         7.2946         6.7800   

2009

     6.8259         6.8295         6.8470         6.8176   

2010

     6.6000         6.7600         6.8330         6.6000   

2011

     6.2939         6.4374         6.6364         6.2939   

2012

     6.2303         6.3085         6.3789         6.2221   

2013

           

August

     6.1193         6.1213        
6.1302
  
     6.1123   

September

     6.1200         6.1198         6.1213         6.1178   

October

     6.0943         6.1032         6.1209         6.0815   

November

     6.0922         6.0929         6.0993         6.0903   

December

     6.0537         6.0738         6.0927         6.0537   

2014

           

January

     6.0590         6.0509         6.0600         6.0402   

February (through February 21)

     6.0912         6.0665         6.0912         6.0591   

 

(1) Annual averages were calculated by using the average of the exchange rates on the last day of each month during the relevant year. Monthly averages were calculated by using the average of the daily rates during the relevant month.

 

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ENFORCEABILITY OF CIVIL LIABILITIES

We were incorporated in the Cayman Islands in order to enjoy the following benefits:

 

   

political and economic stability;

 

   

an effective judicial system;

 

   

a favorable tax system;

 

   

the absence of exchange control or currency restrictions; and

 

   

the availability of professional and support services.

However, certain disadvantages accompany incorporation in the Cayman Islands. These disadvantages include, but are not limited to, the following:

 

   

the Cayman Islands has a less developed body of securities laws as compared to the United States and these securities laws provide significantly less protection to investors; and

 

   

Cayman Islands companies may not have standing to sue before the federal courts of the United States.

Our constitutional documents do not contain provisions requiring that disputes, including those arising under the securities laws of the United States, between us, our officers, directors and shareholders, be arbitrated.

Substantially all of our operations are conducted and substantially all of our assets are located in China. A majority of our directors and officers are nationals or residents of jurisdictions other than the United States and a substantial portion of their assets are located outside the United States. As a result, it may be difficult for a shareholder to effect service of process within the United States upon these persons, or to enforce against us or them judgments obtained in U.S. courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States.

We have appointed Law Debenture Corporate Services Inc. as our agent upon whom process may be served in any action brought against us under the securities laws of the United States.

Conyers Dill & Pearman (Cayman) Limited, our special Cayman counsel, and King & Wood Mallesons Lawyers, our counsel as to PRC law, have advised us that there is uncertainty as to whether the courts of the Cayman Islands and China, respectively, would:

 

   

recognize or enforce judgments of U.S. courts obtained against us or our directors or officers predicated upon the civil liability provisions of the federal securities laws of the United States or any state in the United States; or

 

   

entertain original actions brought in each respective jurisdiction against us or our directors or officers predicated upon the securities laws of the United States or any state in the United States.

Conyers Dill & Pearman (Cayman) Limited has informed us that it is uncertain whether the courts of the Cayman Islands will allow shareholders of our company to originate actions in the Cayman Islands based upon securities laws of the United States. In addition, there is uncertainty with regard to Cayman Islands law related to whether a judgment obtained from the U.S. courts under civil liability provisions of U.S. securities laws will be determined by the courts of the Cayman Islands as penal or punitive in nature. If such a determination is made, the courts of the Cayman Islands will not recognize or enforce the judgment against a Cayman Islands company, such as our company. As the courts of the Cayman Islands have yet to rule on making such a determination in relation to judgments obtained from U.S. courts under civil liability provisions of U.S. securities laws, it is uncertain whether such judgments would be enforceable in the Cayman Islands. Conyers Dill & Pearman (Cayman) Limited has further advised us that the courts of the Cayman Islands would recognize as a valid

 

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judgment a final and conclusive judgment in personam obtained in the federal or state courts in the United States under which a sum of money is payable (other than a sum of money payable in respect of multiple damages, taxes or other charges of a like nature or in respect of a fine or other penalty) or, in certain circumstances, an in personam judgment for non-monetary relief, and would give a judgment based thereon provided that: (a) such courts had proper jurisdiction over the parties subject to such judgment; (b) such courts did not contravene the rules of natural justice of the Cayman Islands; (c) such judgment was not obtained by fraud; (d) the enforcement of the judgment would not be contrary to the public policy of the Cayman Islands; (e) no new admissible evidence relevant to the action is submitted prior to the rendering of the judgment by the courts of the Cayman Islands; and (f) there is due compliance with the correct procedures under the laws of the Cayman Islands.

King & Wood Mallesons Lawyers has advised us that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based either on treaties between China and the country where the judgment is made or on reciprocity between jurisdictions. China does not have any treaties or other agreements with the United States or the Cayman Islands that provide for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates the basic principles of PRC laws or national sovereignty, security or public interest. As a result, it is uncertain whether a PRC court would enforce a judgment rendered by a court in the United States. In addition, although U.S. shareholders may be able to originate actions against us in China in accordance with PRC laws, it will be difficult for U.S. shareholders to do so because we are incorporated under the laws of the Cayman Islands and it is difficult for U.S. shareholders, by virtue only of holding our ADSs or ordinary shares, to establish a connection to the PRC for a PRC court to have subject matter jurisdiction as required by the PRC Civil Procedures Law.

Davis Polk & Wardwell, Hong Kong Solicitors, our counsel as to Hong Kong law, has further advised us that Hong Kong has no arrangement for the reciprocal enforcement of judgments with the United States. There is therefore doubt as to the enforceability in Hong Kong in original actions or in actions for enforcement of judgments of United States courts, of civil liabilities predicated solely upon the federal securities laws of the United States or the securities laws of any State or territory within the United States.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data for the periods and as of the dates indicated are qualified in their entirety by reference to, and should be read in conjunction with, our consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” both of which are included elsewhere in this prospectus.

In March 2014, iKang Guobin Healthcare Group, Inc., or iKang Guobin, became the wholly owned subsidiary of our company through a share exchange through which we acquired all the issued and outstanding shares of iKang Guobin, and issued common and preferred shares to the shareholders of iKang Guobin. See “Our History and Corporate Structure.”

The selected consolidated statements of operations data and selected consolidated cash flows data presented below for the years ended March 31, 2011, 2012 and 2013 and the selected consolidated balance sheet data as of March 31, 2012 and 2013 have been derived from the audited consolidated financial statements of iKang Guobin included elsewhere in this prospectus. The audited consolidated financial statements of iKang Guobin are prepared and presented in accordance with accounting principles generally accepted in the United States, or U.S. GAAP, and have been audited by Deloitte Touche Tohmatsu Certified Public Accountants LLP, an independent registered public accounting firm. The selected consolidated statements of operations data and selected consolidated statements of cash flow data presented below for the nine months ended December 31, 2012 and 2013 and the selected consolidated balance sheet data as of December 31, 2013 have been derived from the unaudited condensed consolidated financial statements of iKang Guobin included elsewhere in this prospectus. The selected consolidated statements of operations data and selected consolidated cash flows data for the years ended March 31, 2011, 2012 and 2013 and the nine months ended December 31, 2013 and the selected consolidated balance sheet data as of March 31, 2012 and 2013 and December 31, 2013 of our company, iKang Healthcare Group, Inc., are not presented below because our company had no operations in these periods.

Our historical results are not necessarily indicative of our results to be expected for any future period.

 

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Selected Consolidated Statement of Operations Data:

 

     For the Year Ended March 31,     For the Nine
Months Ended
December 31,
 
     2011      2012         2013         2012     2013  
     US$      US$     US$     US$     US$  
     (in thousands, except per share data)  

Net revenues

     68,231         93,713        133,871        115,511        172,762   

Cost of revenues

     39,795         49,506        71,079        56,366        82,735   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     28,436         44,207        62,792        59,145        90,027   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

           

Selling and marketing

     9,970         14,005        18,486        13,186        23,046   

General and administrative

     11,172         14,756        23,447        16,495        25,015   

Research and development

     733         748        1,270        970        1,295   

Impairment of goodwill

     70         —          —          —          —     

Write-off of leasehold improvement

     486         309        —          —          —     
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     22,431         29,818        43,203        30,651        49,356   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     6,005         14,389        19,589        28,494        40,671   

Interest expense

     —           (159     (1,106     (749     (1,038

Gain from forward contracts

     —           —          —          —          230   

Interest Income

     62         101        100        69        54   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

     6,067         14,331        18,583        27,814        39,917   

Income tax expenses

     1,952         3,939        6,134        8,075        12,021   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     4,115         10,392        12,449        19,739        27,896   

Less: Net income attributable to non-controlling interest

     541         690        338        504        633   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to iKang Guobin Healthcare Group, Inc.

     3,574         9,702        12,111        19,235        27,263   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Deemed dividend to preferred shareholders

     —           2,312        84,306        5,110       
20,436
  

Undistributed earnings allocated to preferred shareholders

     2,770         2,770        2,818        2,087        5,291   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common and preferred shareholders of iKang Guobin Healthcare Group, Inc.

     804         4,620        (75,013     12,038        1,536   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share attributable to common shareholders of iKang Guobin Healthcare Group, Inc.

           

Basic

     0.04         0.22        (11.22     0.56        0.06   

Diluted

     0.04         0.21        (11.22     0.54        0.06   

Pro forma net income per common share

           

Basic

     0.17         0.45        0.56        0.89        1.05   

Diluted

     0.17         0.45        0.55        0.88        1.04   

Summary Non-GAAP Financial Data:

           

Adjusted EBITDA(1)

     11,849         21,199        29,572        34,023        47,930   

 

(1) See “— Non-GAAP Financial Measure.”

 

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Selected Consolidated Balance Sheet Data:

     As of March 31,     As of December 31,  
     2011     2012     2013     2013     2013
(unaudited
pro forma)
 
     US$     US$     US$     US$     US$  
    

(in thousands)

 

Total current assets

     31,887        37,299        104,478        152,311        152,311   

Total assets

     69,244        87,316        165,361        269,829        269,829   

Total current liabilities

     33,041        42,095        73,924        118,092        118,092   

Total liabilities

     33,468        54,056        74,548        123,136        123,136   

Convertible redeemable preferred shares

     82,452        84,764        213,978        264,517        —     

Total iKang Guobin Healthcare Group, Inc. Shareholders’ equity (deficit)

     (48,245     (52,212     (124,195     (119,596     114,921   

Non-controlling interests

     1,569        708        1,030        1,772        1,772   

Total liabilities, mezzanine equity and shareholders’ equity (deficit)

     69,244        87,316        165,361        269,829        269,829   

 

(a) Unaudited Pro forma balance sheet information as of December 31, 2013 assumes the automatic conversion of all of the outstanding convertible redeemable preferred shares into Class A common shares at the original conversion ratio, as if the conversion had occurred as of March 31, 2013.

Selected Consolidated Statements of Cash Flows Data:

 

     For the Year Ended March 31,     For the Nine
Months Ended
December 31,
 
     2011     2012     2013     2012     2013  
     US$     US$     US$     US$     US$  
    

(in thousands)

 

Net cash provided by operating activities

     10,794        14,005        16,314        26,436        48,326   

Net cash used in investing activities

     (5,298     (15,706     (16,058     (8,681     (77,860

Net cash (used in)/provided by financing activities

     (277     (1,161     50,824        6,014        27,572   

Effect of exchange rate changes

     472        595        199        566        788   

Net (decrease) increase in cash and cash equivalents

     5,691        (2,267     51,279        24,335        (1,174

Cash and cash equivalents at the beginning of year (period)

     8,451        14,142        11,875        11,875        63,154   

Cash and cash equivalents at the end of year (period)

     14,142        11,875        63,154        36,210        61,980   

Non-GAAP Financial Measure

To supplement our consolidated financial statements which are presented in accordance with U.S. GAAP, we also use Adjusted EBITDA as an additional non-GAAP financial measure. We present this non-GAAP financial measure because it is used by our management to evaluate our operating performance. We also believe that this non-GAAP financial measure provides useful information to investors and others in understanding and evaluating our consolidated results of operations in the same manner as our management and in comparing financial results across accounting periods and to those of our peer companies.

Adjusted EBITDA, as we present it, represents (loss) income from operations, adjusted for depreciation and amortization, impairment of goodwill, impairment of acquired intangible assets, impairment of leasehold improvement, and share-based compensation expense.

The use of Adjusted EBITDA has certain limitations because it does not reflect all items of income and expenses that affect our operations. Items excluded from Adjusted EBITDA are significant components in

 

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understanding and assessing our operating and financial performance. Depreciation and amortization, as well as impairment of goodwill, impairment of acquired intangible assets, impairment of leasehold improvement and share-based compensation expenses have been and may continue to be incurred in our ordinary course of business and are not reflected in the presentation of Adjusted EBITDA. Each of these items should also be considered in the overall evaluation of our results. Additionally, Adjusted EBITDA does not consider changes in working capital, capital expenditures and other investing activities and should not be considered as a measure of our liquidity. The term Adjusted EBITDA is not defined under U.S. GAAP, and Adjusted EBITDA is not a measure of net income, operating income, operating performance or liquidity presented in accordance with U.S. GAAP.

We have reconciled the non-GAAP financial measure to the most comparable U.S. GAAP performance measure, all of which should be considered when evaluating our performance. The following table reconciles our Adjusted EBITDA in the periods/years presented to the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP, which is net loss:

 

     For the Year Ended March 31,     For the Nine Months Ended
December 31,
 
     2011     2012     2013     2012     2013  
     US$     US$     US$     US$     US$  
    

(in thousands, except percentages)

 

Income from operations

     6,005        14,389        19,589        28,494        40,671   

Add:

          

Depreciation and amortization

     5,199        6,285        7,710        5,529        7,259   

Impairment of goodwill

     70        —          —          —          —     

Impairment of leasehold improvement

     486        309        —          —          —     

Share-based compensation

     89        216        2,273        —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

     11,849        21,199        29,572        34,023        47,930   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of net revenues

     17.4     22.6     22.1     29.5     27.7

In light of the foregoing limitations for this non-GAAP financial measure, when assessing our operating and financial performance, you should not consider Adjusted EBITDA in isolation or as a substitute for our net loss, operating loss or any other operating or financial performance measure that is calculated in accordance with U.S. GAAP. In addition, because this non-GAAP measure may not be calculated in the same manner by all companies, it may not be comparable to other similar titled measures used by other companies.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the section entitled “Selected Consolidated Financial Data” and our consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.

Overview

We are the largest provider in China’s fast growing private preventive healthcare services market, accounting for approximately 11.6% of market share in terms of revenue in 2012, according to Frost & Sullivan. Through our integrated service platform and established nationwide network of medical centers and third-party service provider facilities, we provide comprehensive and high quality preventive healthcare solutions including a wide range of medical examinations services and value-added services including disease screening and other services. Our customers are primarily corporate customers who contract us to provide medical examination services to their employees and clients and pay for these services at pre-negotiated prices. We also directly market our services to individual customers. In fiscal 2012, we delivered our services to approximately 1.9 million individuals in total, including the employees and clients of our corporate customers.

As of December 31, 2013, our nationwide network consisted of 42 self-owned medical centers, which contributed the majority of our revenue. Our self-owned medical center network covers 13 of the most affluent cities in China, namely Beijing, Shanghai, Guangzhou, Shenzhen, Chongqing, Tianjin, Nanjing, Suzhou, Hangzhou, Chengdu, Fuzhou, Changchun and Jiangyin. We have also supplemented our self-owned medical center network by contracting with approximately 300 third-party service provider facilities which include selected independent medical examination centers and hospitals across all of China’s provinces, creating a nationwide network that allows us to serve our customers in markets where we do not have self-owned medical centers.

Our nationwide network offers a wide range of medical examination services and provides a “one-stop” solution to our corporate customers which have a broad geographic footprint in China. As a single point of contact for our corporate customers, we provide consistent and high quality services to their employees and clients in different locations and reduce their administrative burden. We also provide our customers with professional consultation and medical referrals for additional as-needed diagnosis or treatment. Our centers are independent of hospitals and located in prime urban locations with an average size of 2,500 square meters. Equipped with advanced equipment and staffed with experienced medical professionals, each center provides a comfortable and friendly environment to our customers.

In fiscal 2012 and for the nine months ended December 31, 2013, we generated 83.2% and 79.2% of our net revenues from corporate customers, respectively, and the remainder from individual customers. In fiscal 2012, we served approximately 1.7 million individuals from approximately 11,200 corporate customers in various industries including financial services, telecommunications, retail, consumer goods and information technology, as well as approximately 206,000 individual customers. We served 71 of the 100 largest Chinese companies in 2012 as ranked by Forbes, including the ten largest commercial banks, as well as many other blue-chip Chinese companies. We also serve many large multinational companies in China, including 189 of the companies ranked in the 2013 Fortune Global 500. Among our top 50 customers in fiscal 2012, 90% have been our customers for more than four years. In addition, to cater to the increasing demand for even more extensive and higher quality medical services from China’s growing population of high-net-worth individuals, in September and December 2013, we opened two high-end medical examination centers under our iKang Evergreen brand in Nanjing and Beijing, respectively.

 

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We have grown rapidly since our inception through both organic growth and strategic acquisitions. The number of our self-owned medical centers has grown from one in 2006 to 42 as of December 31, 2013. We have expanded our customer base from approximately 5,200 corporate customers in fiscal 2010 to approximately 11,200 corporate customers in fiscal 2012. Total customer visits increased from approximately 1,067,000 in fiscal 2010 to approximately 1,381,000 in fiscal 2011 and to approximately 1,931,000 in fiscal 2012, representing a CAGR of 34.5%, and the number of total customer visits was approximately 2,306,000 for the nine months ended December 31, 2013. From fiscal 2010 to fiscal 2012, our net revenues grew from US$68.2 million to US$133.9 million, representing a CAGR of 40.1%. Our revenues reached US$172.8 million for the nine months ended December 31, 2013.

Key Factors Affecting Our Results of Operations

Our business and results of operations are affected by the general economic conditions of China, per capita disposable income and consumer spending and conditions affecting the PRC healthcare industry in general, including the growth of healthcare expenditure, initiatives affecting the healthcare industry, government policies and the competition environment. Unfavorable changes in any of these general factors could affect the demand for our services and could materially and adversely affect our results of operations.

In addition to general economic conditions and industry factors, we believe the following company-specific factors have had, and will continue to have, a significant impact on our results of operations.

Continuous Focus on Corporate Customers

We generate a substantial majority of our revenues from our corporate customers. In fiscal 2010, 2011 and 2012, we derived 80.3%, 84.4% and 83.2% of our net revenues, respectively, from our corporate customers. For the nine months ended December 31, 2012 and 2013, we derived 77.6% and 79.2% of our net revenues, respectively, from the corporate customers. Our corporate customers are consisted of multinational corporations, private enterprises, government agencies and state-owned enterprises. The number of our corporate customers increased from approximately 5,200 in fiscal 2010 to approximately 7,100 in fiscal 2011 and further to approximately 11,200 in fiscal 2012. The number of our corporate customers was approximately 10,100 and 16,900 for the nine months ended December 31, 2012 and 2013, respectively. Many of our corporate customers seek to build a healthier and more productive employee base by providing their employees with healthcare benefits such as medical examinations and disease screening options that are typically not included in health insurance plans required by the government. Certain of our corporate customers contract us to provide services to some of their clients to support their company-client relationship. In fiscal 2010, 2011 and 2012 and the nine months ended December 31, 2013, 88%, 90%, 89% and 90%, respectively, of the people who used our services were employees or clients of our corporate customers. As corporate customers have represented a steady and increasing inflow of business in the past, we will continue to focus our marketing efforts on increasing our corporate customers and expect that corporate customers will continue to account for a significant majority of our revenues for the foreseeable future. In addition to medical examinations already covered by corporate customers, we offer tailored services to meet the different needs of individuals under corporate accounts and expect an increasing number of individuals with moderate to high disposable income to purchase these services.

Expansion of Individual Customer Base

Net revenues from our individual customers accounted for 19.7%, 15.6% and 16.8% of our net revenues in fiscal 2010, 2011 and 2012, respectively, and 20.8% of our net revenues for the nine months ended December 31, 2013. We derive revenues from offering our individual customers comprehensive healthcare services, including medical examinations, disease screening and other health management services. We view individual customers as an important long-term growth driver as we are generally able to derive higher profit margins from individual customers than corporate customers. We plan to continue to grow our individual customer base by emphasizing the strength of our diversified and differentiated service offerings and utilizing various sales, marketing and communication strategies to further enhance our brand awareness.

 

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Network of Self-Owned Medical Centers

Our ability to maintain or increase revenue depends, to a large extent, on the size of our nationwide network of self-owned medical centers. In fiscal 2010, 2011 and 2012 and for the nine months ended December 31, 2013, we derived 95%, 96%, 93% and 94% of net revenues from our self-owned medical centers, respectively. As a result, whether we can successfully expand our network of self-owned medical centers is one of the most important factors affecting our results of operations. In addition, we believe the expanded geographic coverage of our self-owned medical center network will enhance our brand recognition and better serve our corporate customers with a nationwide presence. The table below shows the number of our self-owned medical centers in operation throughout the period indicated and the number of our newly opened or acquired centers during each period.

 

     For the Year Ended March 31,      For the Nine
Months Ended
December 31,
 
     2011      2012      2013      2013  

Medical centers at the beginning of the period

     17         21         26         36   

Newly constructed medical centers during the period

     2         3         6         3   

Newly acquired medical centers during the period

     2         2         4         3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Medical centers at the end of the period

     21         26         36         42   
  

 

 

    

 

 

    

 

 

    

 

 

 

We plan to continue to grow our network of self-owned medical centers, which will enable us to enlarge our nationwide coverage, penetrating cities where we do not have presence currently and enhancing our market position where we already operate in. Each additional medical center in our network increases our capacity to provide medical examination services to our corporate and individual customers and contributes to our continued revenue growth. In addition, when we open additional medical centers in a city in which we already have presence, we can leverage our existing sales force, laboratories and technical support in that city and therefore increase the profitability of our local medical centers as a result of economies of scale.

Historically, the expansion of our self-owned medical center network has been driven by developing new medical centers through construction and acquisition. Our self-owned medical centers grew from 17 as of April 1, 2010 to 36 as of March 31, 2013 and to 42 as of December 31, 2013. Out of the 25 self-owned medical centers that were added during this period, 11 were acquired. In fiscal 2010, we acquired two medical centers, including iKang Shenzhen Futian and iKang Nanjing Gulou, which together contributed nil, 3.8% and 5.9% of our net revenues in fiscal 2010, 2011 and 2012, respectively. In fiscal 2011, we acquired two medical centers, including iKang Shanghai Jing’an and iKang Shanghai Zhonghuan, which together contributed 0.2% and 1.9% of our net revenues in fiscal 2011 and 2012, respectively. We acquired iKang Shanghai Jianwei, iKang Shenzhen Kefa, iKang Guangzhou Wokang and iKang Changchun in fiscal 2012, which together contributed 0.2% of our net revenues in fiscal 2012. We acquired Nanjing Aoyang, Shanghai Yuanhua and Zhejiang Ailikang in the nine months ended December 31, 2013, which together contributed 4.9% of our net revenues over the same period. We may use some of the proceeds from this offering in our future acquisitions. See “Use of Proceeds.” Our planned acquisitions will also result in demands being placed on our managerial, operational, technological, financial and other resources. See “Risk Factors — Risks Related to Our Business — We may not realize the anticipated benefits of our past and potential future investments or acquisitions or be able to recruit or integrate any acquired employees, businesses or products, which in turn may negatively affect their performance and respective contributions to our results of operations” elsewhere in this prospectus.

Seasonality

Our results of operations are affected by seasonal factors. Our quarterly revenues and results of operations have fluctuated in the past and may continue to fluctuate significantly. We typically have lower revenues during the fourth quarter of each fiscal year primarily due to the public holidays in that period, including the New Year and Chinese Lunar New Year holidays. Our relatively stronger performance in the third fiscal quarter has been

 

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largely due to the fact that many of our corporate customers arrange for their employees to conduct medical examinations in the third quarter of each fiscal year.

On the other hand, our costs and expenses are less affected by seasonal factors, as a significant portion of such costs and expenses are fixed, except that we typically incur less cost of medical consumables in the fourth fiscal quarter due to the smaller number of people who use our services. As a result, our profitability in the fourth quarter of the fiscal year is typically affected the most by such seasonal factors. We encourage customers to schedule the medical examinations in low seasons to increase the utilization rate of our medical centers in the fourth quarter. In addition, we have been conducting customer visits, pre-examination promotions to encourage customers to take the examination early on during the year instead of waiting till year end when the contracts with corporate customers normally expire.

Utilization of Our Self-Owned Medical Centers

Utilization of our self-owned medical centers are primarily affected by the number of people we can serve on a nationwide basis, which is subject to a capacity limit depending on the space, equipment and the number of doctors and nurses at each medical center, and on the number of individuals who use our self-owned medical centers.

To ensure accuracy of testing results, certain medical examinations can only be scheduled during limited hours in the morning, and thus limiting the number of people we can serve on a daily basis. We need to manage the number of people coming for our medical examination services each day to maintain service and quality standards and to ensure a good customer experience. Our typical medical center has a capacity limit of 350 people per day depending on the space of the center, the number of medical staff including doctors and nurses and the amount of equipment, such as ultrasound and x-ray machines. The capacity of our medical centers serving our high-end customers is smaller due to the exclusive nature of the customer experience. We believe we have successfully managed the utilization of our self-owned medical centers and the profitability of such medical centers will increase as the number of people who use our services grow.

Cooperative Arrangements with Third-Party Service Providers

A portion of our total net revenues is derived from services performed by third-party service providers to our customers under cooperative arrangements between us and third-party service providers in cities where we do not have self-owned medical centers. In fiscal 2010, 2011 and 2012 and for the nine months ended December 31, 2013, 5%, 4%, 7% and 6% of our net revenues were attributable to services performed by third-party service providers, respectively. Despite the relatively smaller revenue contribution, third-party service providers complement our self-owned medical centers and enable us to provide our customers cost-efficient access to consistent and quality services across a wide geographic area.

The fees that we pay to third-party service providers are calculated based on the number of medical examinations they perform for our customers. In negotiations with third-party service providers as to the fees we pay them, we consider factors such as:

 

   

the overall fees we charge to our corporate customers requiring nationwide services;

 

   

the types of tests in the medical examination package; and

 

   

the local market price for medical examination services.

Costs of Medical Consumables and Outsourced Services

Medical consumables, including reagents, testing instruments and other consumables used in medical tests and treatment, and costs for outsourced services, including medical tests conducted by qualified third-party laboratories and medical institutions and other services performed by third-party service providers to our

 

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customers, have been the largest component of our cost of revenues, representing 40.4%, 38.0% and 38.8% of our cost of revenues in fiscal 2010, 2011 and 2012, respectively, and 41.6% and 40.1% of our cost of revenues for the nine months ended December 31, 2012 and 2013, respectively. As a percentage of our cost of revenues, costs of medical consumables and outsourced services decreased from fiscal 2010 to fiscal 2011 primarily as a result of our enhanced bargaining power with third-party service providers and strengthened cost control of outsourced services, including (i) increasing the number of self-owned medical centers and laboratories and reducing the percentage of services provided by third-party service providers in those cities and (ii) establishing centralized procurement and management of consumables. Costs of medical consumables and outsourced services increased from fiscal year 2011 to fiscal 2012, and from the nine months ended December 31, 2012 to the same period in 2013, primarily because, despite our reduction and cost control of outsourced services, such costs increased in line with the growth of our medical examination business while the other costs including salaries, rental and office expenses are relatively fixed in nature once a medical center ramps up its business. To a lesser extent, such increase also reflected our efforts to gradually improve the quality of the medical consumables used in our services. We have set up a centralized purchasing system in each city in which we operate our self-owned medical centers with our main suppliers of general medical consumables and in particular for reagents which are relatively expensive. Such centralized purchasing systems enable us to obtain more favorable pricing if we purchase a certain amount of medical consumables from a supplier within a given period of time.

Key Components of Our Results of Operations

Net Revenues

Our net revenues primarily consist of revenues generated from (i) medical examinations, (ii) disease screening and (iii) other services, including dental care services, outpatient services, medical concierge and other health management services. The following table sets forth a breakdown of net revenues, both in absolute amount and as a percentage of total net revenues, for the periods indicated.

 

    For the Year Ended March 31,     For the Nine Months Ended December 31,  
    2011     2012     2013     2012     2013  
    US$     %     US$     %     US$     %     US$     %     US$     %  
    (in thousands except percentages)  

Net Revenues:

                   

Medical examinations

    54,903        80.5        78,997        84.3        116,449        87.0        101,457        87.8        151,093        87.5   

Disease screening

    3,077        4.5        5,162        5.5        9,240        6.9        7,757        6.7        12,675        7.3   

Other services(1)

    10,251        15.0        9,554        10.2        8,182        6.1        6,297        5.5        8,994        5.2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    68,231        100.0        93,713        100.0        133,871        100.0        115,511        100.0        172,762        100.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes dental care services, outpatient services, medical concierge and other health management services.

Medical Examinations

Net revenues from medical examinations accounted for 80.5%, 84.3% and 87.0% of our net revenues in fiscal 2010, 2011 and 2012, respectively, and 87.8% and 87.5% of our net revenues for the nine months ended December 31, 2012 and 2013, respectively. We generate net revenues by charging our corporate and individual customers for using our medical examination services provided through our self-owned medical centers or through third-party service providers. The fees we charge each of our customers for medical examination services are based on the specific tests included in the medical examination package which are customized for and agreed to by each customer. Our medical examination packages usually cover, among others, internal, gynecology, ophthalmology, ENT, dental, lab tests, electrocardiogram, ultrasound and X-ray. For our corporate customers, we collect payment based on the pre-agreed fees and the number of people who actually have had their medical examinations done at our self-owned medical centers or third-party service providers.

 

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The following table sets forth a breakdown of net revenues from medical examinations for the periods indicated.

 

    For the Year Ended March 31,     For the Nine Months Ended December 31,  
    2011     2012     2013     2012     2013  
    US$     %     US$     %     US$     %     US$     %     US$     %  
    (in thousands except percentages)  

Net revenues from medical examinations:

                   

Corporate customers

    46,851        85.3        69,600        88.1        99,320        85.3        87,448        86.2        133,030        88.0   

Individual customers

    8,052        14.7        9,397        11.9        17,129        14.7        14,009        13.8        18,063        12.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    54,903        100.0        78,997        100.0        116,449        100.0        101,457        100.0        151,093        100.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

We believe the most significant factors that directly affect net revenues from medical examinations include:

 

   

Number of people who use our services. The majority of our net revenues from medical examination services are generated from our corporate customers, including multinational corporations, private enterprises, government agencies and state-owned enterprises. Net revenues from corporate customers accounted for 85.3%, 88.1% and 85.3% of our net revenues from medical examination services in fiscal 2010, 2011 and 2012, respectively, and 86.2% and 88.0% of our net revenues from medical services for the nine months ended December 31, 2012 and 2013, respectively. We increased the number of our corporate customers from approximately 5,200 in fiscal 2010 to approximately 7,100 in fiscal 2011 and further to approximately 11,200 in fiscal 2012, and we had approximately 16,900 corporate customers for the nine months ended December 31, 2013. Our corporate customers brought approximately 773,000, 1,179,000 and 1,583,000 people who used our medical examination services or third-party providers’ services in fiscal 2010, 2011 and 2012, respectively. In the nine months ended December 31, 2012 and 2013, our corporate customers brought in approximately 1,401,000 and 1,952,000 people who used our medical examination services and third-party providers’ services, respectively. We expect net revenues from medical examination services provided to our corporate customers to continue to increase and account for a substantial majority of our net revenues in the foreseeable future.

Net revenues from individual customers accounted for 14.7%, 11.9% and 14.7% of our net revenues from medical examination services in fiscal 2010, 2011 and 2012, respectively, and 13.8% and 12.0% of our net revenues from medical examination services for the nine months ended December 31, 2012 and 2013, respectively. The number of individual customers who used our services increased from approximately 70,000 in fiscal 2010 to approximately 77,000 in fiscal 2011 and further to approximately 150,000 in fiscal 2012. The number of our individual customers was approximately 116,000 and 188,000 for the nine months ended December 31, 2012 and 2013, respectively. We plan to increase the number of our high net-worth individual, corporate executive, professional and health-conscious individual customers who are willing to purchase our services, especially our high-end services, and we expect revenues generated from medical examinations for individual customers to further increase in both absolute amount and as a percentage of our net revenues.

 

   

Average price per person who uses our services. The average price per person we charge our individual customers is higher than the average price per person we charge our corporate customers. The average price under our corporate accounts was US$61, US$59 and US$63 per person in fiscal 2010, 2011 and 2012, respectively, and US$62 and US$68 per person for the nine months ended December 31, 2012 and 2013, respectively. The average price per person for corporate customers decreased from fiscal 2010 to fiscal 2011 primarily due to our promotional activities that offered lower prices to attract corporate customers. The average price per person for corporate customers increased from fiscal 2011

 

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to fiscal 2012, and from the nine months ended December 31, 2012 to the nine months ended December 31, 2013, primarily because we started to optimize our customer base and focused on corporate customers whom we charge higher average billing price.

The average price for individual customers was US$116, US$121 and US$114 per person in fiscal 2010, 2011 and 2012, respectively, and US$121 and US$96 per person for the nine months ended December 31, 2012 and 2013, respectively. The average price per person for individual customers decreased from fiscal 2011 to fiscal 2012 primarily because we strengthened our sales efforts to individual customers by offering more competitive prices to attract more individual customers. The average price per person for individual customers decreased from the nine months ended December 31, 2012 to the nine months ended December 31, 2013 primarily due to the increased online sales volume of our basic medical examination packages which have relatively low prices.

The blended average price per person under both corporate accounts and individual accounts was US$65, US$63 and US$67 in fiscal 2010, 2011 and 2012, respectively, and US$67 and US$71 per person for the nine months ended December 31, 2012 and 2013, respectively.

Disease Screening

We charge individuals under our corporate accounts who opt to add additional tests to the predetermined scope of medical examinations packages agreed by our corporate customers. We refer to such services as disease screening services. Net revenues from our disease screening services accounted for 4.5%, 5.5% and 6.9% of our net revenues in fiscal 2010, 2011 and 2012, respectively, and 6.7% and 7.3% of our net revenues for the nine months ended December 31, 2012 and 2013, respectively. Our disease screening services consist primarily of cancer screening, cardiovascular disease screening, certain chronic disease screening and functional medicine testing. We usually charge fees based on the tests which the customer chooses for specific diseases. We plan to develop a wider range of disease screening programs and expect revenues from disease screening services to continue to grow in absolute amount and as a percentage of our net revenues.

Other Services

Other services primarily consist of dental care services, outpatient services, medical concierge and other health management services. Net revenues from other services accounted for 15.0%, 10.2% and 6.1% of our net revenues in fiscal 2010, 2011 and 2012, respectively, and 5.5% and 5.2% of our net revenues for the nine months ended December 31, 2012 and 2013, respectively. We charge fees based on the specific service performed upon the requests by our customers. We do not expect net revenues generated from other services except for dental care to grow in absolute amount or as a percentage of net revenues in the foreseeable future as we focus our growth on medical examinations and disease screening businesses.

 

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Cost of Revenues

Our cost of revenues primarily consists of (i) medical consumables and outsourced services, (ii) salaries and benefits to doctors and nurses at our self-owned medical centers, (iii) rental and office expenses associated with our healthcare services and (iv) depreciation and amortization cost. Our total cost of revenues accounted for 58.3%, 52.8% and 53.1% of our net revenues in fiscal 2010, 2011 and 2012, respectively, and 48.8% and 47.9% of our net revenues for the nine months ended December 31, 2012 and 2013, respectively. The following table sets forth the components of cost of revenues, both in absolute amount and as a percentage of net revenues, for the periods presented.

 

    For the Year Ended March 31,     For the Nine Months Ended
December 31,
 
    2011     2012     2013     2012     2013  
    US$     %     US$     %     US$     %     US$     %     US$     %  
    (in thousands except percentages)  

Net revenues

    68,231        100.0        93,713        100.0        133,871        100.0        115,511        100.0        172,762        100.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenues:

                   

Medical consumables and outsourced services

    16,077        23.6        18,794        20.1        27,598        20.6        23,425        20.3        33,200        19.2   

Salaries and benefits

    10,326        15.1        14,045        15.0        20,910        15.6        16,557        14.4        24,952        14.5   

Rental and office expenses

    9,322        13.6        11,320        12.1        15,922        11.9        11,601        10.0        18,523        10.7   

Depreciation and amortization

    4,070        6.0        5,347        5.6        6,649        5.0        4,783        4.1        6,060        3.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

    39,795        58.3        49,506        52.8        71,079        53.1        56,366        48.8        82,735        47.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Medical Consumables and Outsourced Services

Medical consumables and outsourced services costs consist of the costs we pay for reagents, testing instruments and other consumables used in medical tests and treatment, costs for outsourced medical tests conducted by qualified independent laboratories, and fees paid to third-party service providers in our nationwide network of medical centers who provide services to our customers. Cost of medical consumables and outsourced services constituted approximately 23.6%, 20.1% and 20.6% of our net revenues in fiscal 2010, 2011 and 2012, respectively, and 20.3% and 19.2% of our net revenues for the nine months ended December 31, 2012 and 2013, respectively.

Our third-party service providers perform services to our corporate customers, who require us to provide nationwide medical examination services and inpatient care, outpatient services, specialized testing or dental care that we do not provide in certain of our self-owned medical centers or in cities where we do not operate. We pay service fees to third-party service providers based on the number of medical examinations and the specific services they perform. We expect costs associated with purchase of medical consumables and costs for outsourced medical tests and third-party services to increase in an absolute amount as we continue to expand our business.

We have established centralized purchasing systems at both the regional and national levels to purchase medical consumables from a selected group of suppliers, which enables our medical centers to obtain favorable prices for medical consumables and therefore lower our cost.

Salaries and Benefits

Salaries and benefits cost primarily comprises compensation to the doctors and nurses at our self-owned medical centers. Salaries and benefits cost accounted for approximately 15.1%, 15.0% and 15.6% of our net revenues in fiscal 2010, 2011 and 2012, respectively, and 14.4% and 14.5% of our net revenues for the nine

 

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months ended December 31, 2012 and 2013, respectively. We expect costs associated with salaries and benefits to increase on an absolute basis as we continue to increase the number of our self-owned medical centers and hire more doctors and nurses. The number of doctors and nurses at our self-owned medical centers was 1,148, 1,604, 2,104 and 2,666 as of March 31, 2011, 2012 and 2013 and December 31, 2013.

Rental and Office Expenses

Rental and office expenses primarily consist of rental fees and office expenses directly associated with the use of medical centers. Rental and office expenses amounted to US$9.3 million, US$11.3 million and US$15.9 million, and accounted for approximately 13.6%, 12.1% and 11.9% of our net revenues, in fiscal 2010, 2011 and 2012, respectively. Rental and office expenses amounted to US$11.6 million and US$18.5 million, and accounted for approximately 10.0% and 10.7% of our net revenues for the nine months ended December 31, 2012 and 2013, respectively. We expect our rental and office expenses to increase in an absolute amount in the foreseeable future as we increase the number of our self-owned medical centers.

Depreciation and Amortization

We include in our cost of revenues (i) depreciation expenses for medical equipment that we purchased for business, and (ii) amortization costs for intangible assets we acquired in connection with the acquisition of medical centers. Depreciation and amortization cost constituted approximately 6.0%, 5.6% and 5.0% of our net revenues in fiscal 2010, 2011 and 2012, respectively, and 4.1% and 3.5% of our net revenues for the nine months ended December 31, 2012 and 2013, respectively.

Gross Profit and Gross Margin

Gross profit increased 42.0% to US$62.8 million in fiscal 2012 from US$44.2 million in fiscal 2011, which in turn increased 55.5% from US$28.4 million in fiscal 2010. Gross profit increased 52.2% to US$90.0 million for the nine months ended December 31, 2013 from US$59.1 million for the nine months ended December 31, 2012. Gross margin decreased to 46.9% in fiscal 2012 from 47.2% in fiscal 2011, which increased from 41.7% in fiscal 2010. Gross margin increased to 52.1% for the nine months ended December 31, 2013 from 51.2% for the nine months ended December 31, 2012. The decrease in gross margin in fiscal 2012 primarily reflected the increase in rental costs and costs associated with opening new centers, including related increases in medical consumables and outsourced services for the new centers. The increase in gross margin in fiscal 2011 primarily reflected the economies of scale as the gross margin of our medical centers typically increases in line with the growth in revenues because a significant portion of our cost of revenues is relatively fixed in nature. The increase in gross margin from the nine months ended December 31, 2012 to the same period in 2013 primarily reflected our continued efforts on cost control of medical consumables and outsourced services.

 

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Operating Expenses

Operating expenses consist of (i) sales and marketing expenses, (ii) general and administrative expenses, (iii) research and development, and (iv) impairment of goodwill and leasehold improvement. The following table sets forth the components of operating expenses, both in absolute amount and as a percentage of net revenues, for the periods indicated.

 

    For the Year Ended March 31,     For the Nine Months Ended
December 31,
 
    2011     2012     2013     2012     2013  
    US$     %     US$     %     US$     %     US$     %     US$     %  
    (in thousands except percentages)  

Net revenues

    68,231        100.0        93,713        100.0        133,871        100.0        115,511        100.0        172,762        100.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

                   

Sales and marketing

    9,970        14.6        14,005        14.9        18,486        13.9        13,186        11.4        23,046        13.4   

General and administrative

    11,172        16.4        14,756        15.8        23,447        17.5        16,495        14.3        25,015        14.5   

Research and development

    733        1.1        748        0.8        1,270        0.9        970        0.8        1,295        0.7   

Impairment of goodwill

    70        0.1        —          —          —          —          —          —          —          —     

Write-off of leasehold improvement

    486        0.7        309        0.3        —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    22,431        32.9        29,818        31.8        43,203        32.3        30,651        26.5        49,356        28.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Sales and Marketing

Sales and marketing expenses primarily consist of (i) salaries, performance-based bonuses and employee benefits for our sales and marketing personnel, (ii) office rental and general expenses associated with the sales and marketing of our business, (iii) advertising and promotion expenses, (iv) professional fees in connection with the training for our sales and marketing personnel and market research and surveys, and (v) depreciation and amortization expenses associated with the office space occupied by our sales and marketing personnel. Although our sales and marketing expenses will increase as we further expand our business and promote our brand, we expect sales and marketing expenses as a percentage of net revenues to decrease in the long run due to the increase in productivity of our sales force and additional revenue from disease screening generated on-site in our medical centers.

General and Administrative

General and administrative expenses primarily consist of (i) salaries, employee benefits and other headcount-related expenses associated with the administration of our business, (ii) office rental and general expenses, (iii) professional fees in connection with audit, legal, valuation and market research and consulting services from professional advisors, (iv) depreciation and amortization expenses associated with the office space occupied by our general and administrative personnel, and (v) other expenses including provision for doubtful accounts. We expect that our general and administrative expenses will continue to increase in the near term as we hire additional personnel and incur additional costs in connection with the expansion of our business and with being a public company, including costs to enhance our internal controls.

Our operating expenses include share-based compensation charges. See “— Critical Accounting Policies — Share-Based Compensation.”

Research and Development

Research and development expenses primarily consist of (i) salaries and benefits for research and development personnel, (ii) office rental and general expenses associated with the research and development

 

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activities, (iii) professional fees for outsourcing the development of some of our information technology systems and (iv) related depreciation and amortization expenses. Our research and development activities primarily consist of the development and maintenance of our information technology platform and technical support for our customer services. We expect our research and development expenses to continue to increase on an absolute basis as we intend to hire additional research and development personnel and outsource certain of our information technology functions to further expand our technology platform, enhance user experience and support the expected growth of our business.

Impairment of Goodwill and Leasehold Improvement

We incurred impairment of goodwill in fiscal 2010 and incurred impairment of leasehold improvement in fiscal 2010 and fiscal 2011. See “— Critical Accounting Policies — Impairment of Goodwill and Intangible Assets” and “— Critical Accounting Policies — Impairment of Property, Equipment and Other Long-Lived Assets.”

Income Taxes

Cayman Islands

Under the current laws of the Cayman Islands, we are not subject to tax on income or capital gains. In addition, upon payment of dividends to our shareholders, no Cayman Islands withholding tax will be imposed.

BVI

Under the current laws of the BVI, we are not subject to tax on income or capital gains. In addition, upon payment of dividends by us to our shareholders, no BVI withholding tax will be imposed.

Hong Kong

Bayley & Jackson (China) Medical Services Limited is subject to Hong Kong profits tax at 16.5% on its activities conducted in Hong Kong.

PRC

Since January 1, 2008, our PRC subsidiaries have been subject to the 25% standard enterprise income tax except for the following entities that have been granted preferential tax treatment.

On January 1, 2008, Beijing iKang obtained the High and New Technology Enterprise, or HNTE, status under the PRC Enterprise Income Tax Law, or the EIT Law, and became entitled to a preferential tax rate of 15% as long as it qualified as a HNTE. Beijing iKang enjoyed the preferential tax rate of 15% from January 1, 2008 to December 31, 2010. Income tax rate for Beijing iKang was 25% starting from January 1, 2011.

Shanghai iKang and iKang Holding were established in the “Shanghai Pudong Economic Open Zone,” which entitled them to a preferential tax rate of 15% prior to January 1, 2008. Based on the transition rules of the EIT Law, iKang Holdings and Shanghai iKang continued to enjoy preferential tax rates of 18%, 20%, 22%, 24%, in 2008, 2009, 2010 and 2011, respectively, due to the preferential tax qualification obtained prior to January 1, 2008.

iKang Shenzhen Nanshan, iKang Shenzhen Luohu and iKang Shenzhen Futian are subject to PRC individual income tax rate of 35% due to regulations set by local governments.

 

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Under the EIT Law and the EIT Law Implementation Regulations which became effective on January 1, 2008, enterprises organized under the laws of jurisdictions outside the PRC whose “de facto management bodies” are located in China are considered PRC resident enterprises for tax purposes and will be subject to the uniform 25% enterprise income tax rate on their global income. Circular 82 and Bulletin 45 issued by the SAT set forth the definition of “de facto management body” and provide the guidance for determining the tax residency status of a Chinese controlled offshore incorporated enterprise. Although Circular 82 applies only to offshore enterprises controlled by PRC enterprises or PRC corporate groups and not those controlled by PRC individuals, the determination criteria set forth in Circular 82 may reflect the SAT’s general position on how the “de facto management body” test should be applied in determining the tax residency status of offshore enterprises, regardless of whether they are controlled by PRC enterprises or individuals or foreign enterprises. The term “de facto management body” is generally defined as a management body that exercises overall or substantial management and control over the production, operation, personnel, accounting and assets of an enterprise. If we would be considered to be a PRC resident enterprise for tax purposes, our global income will be subject to PRC enterprise income tax at the rate of 25%. See “Risk Factors — Risks Related to Doing Business in China — Our global income and the dividends that we may receive from our PRC subsidiaries may be subject to PRC taxes under the EIT Law, which may have a material adverse effect on our results of operations.”

The EIT Law and the EIT Law Implementation Regulations provide that PRC-sourced income of foreign enterprises, such as dividends or interest paid by a PRC subsidiary to its overseas parent, will normally be subject to PRC withholding tax at a rate of 10%, unless there are applicable treaties that reduce such rate. Holding companies in Hong Kong, for example, may be subject to a 5% withholding tax rate if they are the “beneficial owner” of related dividends. Neither the Cayman Islands, where our company is incorporated, nor the BVI, where iKang Zhejiang Inc., or iKang Zhejiang BVI, is incorporated, has a tax treaty with China. Thus, dividends paid to us by our subsidiaries in China will be subject to the 10% withholding tax unless we are considered a PRC resident enterprise under the EIT Law and such dividends qualify as tax-exempt income. See “Risk Factors — Risks Related to Doing Business in China — Our global income and the dividends that we may receive from our PRC subsidiaries may be subject to PRC taxes under the EIT Law, which may have a material adverse effect on our results of operations.”

Critical Accounting Policies

We prepare the financial statements of iKang Guobin Healthcare Group, Inc. in conformity with U.S. GAAP, which requires us to make judgments, estimates and assumptions. We continually evaluate these estimates and assumptions based on the most recently available information, our own historical experience and various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from our expectations as a result of changes in our estimates.

An accounting policy is considered critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time such estimate is made, and if different accounting estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur, could materially impact the consolidated financial statements. We believe that the following accounting policies involve a higher degree of judgment and complexity in their application and require us to make significant accounting estimates. The following descriptions of critical accounting policies, judgments and estimates should be read in conjunction with our consolidated financial statements and other disclosures included in this prospectus.

Revenue Recognition

We provide medical examination services, disease screening services and other services to both individual and corporate customers, and we recognize revenues when the following four revenue recognition criteria are met: persuasive evidence of an arrangement exists, services are performed and received by the customer, the amount of fees from the customer is fixed or determinable, and collectability is reasonably assured.

 

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Medical Examination and Disease Screening

We offer medical examination and disease screening services and we render such services at the request of our customers when they visit our facilities. Medical examinations normally cover, among others, the following basic examination items: internal, gynecology, ophthalmology, ENT, dental, lab tests, electrocardiogram ultrasound and X-ray, and disease screening focuses on cancer screening, cardiovascular disease screening, certain chronic disease screening and functional medicine testing. We recognize revenues when the examination reports are issued and passed to the local couriers if hard copy reports are required by our customers, or when the examination reports are uploaded online and can be viewed by the customers online if hard copy reports are not required. We notify our customers when their examination reports are delivered to the local couriers or ready to be viewed and downloaded online. Approximately 90% of our corporate customers are located in the same city as our medical centers. A substantial portion of such corporate customers can receive the report package with same day of delivery, while a small number of such corporate customers receive the examination reports on the following day. For corporate customers (representing approximately 10% of the total number of corporate customers) which are located in different cities from where our medical centers are located, the delivery of the examination reports will generally take no more than three business days. Corporate customers usually prepay a portion of the service fees upon signing of the contract and fulfill the remaining payment obligations based on the number of services consumed by their employees. We record accounts receivables from our corporate customers when the examination reports have been delivered to employees of the corporate customers but we have not receive payments from such corporate customers.

For individual customers, we recognize revenues when the examination reports are issued and available for pick-up or to be reviewed online as we are not contractually obligated to physically deliver written examination reports to individual customers. We typically collect fees before performing medical examination and disease screening services.

Medical examination and disease screening services represent approximately 85.0%, 89.8% and 93.9% of our net revenues in fiscal 2010, 2011 and 2012, respectively, and 94.5% and 94.8% of our net revenues for the nine months ended December 31, 2012 and 2013, respectively.

Third-Party Service Providers

We engage third-party providers to provide medical examination services on behalf of us. We evaluate the services provided by the third parties to determine whether to recognize the revenues on a gross or net basis. The determination is based upon an assessment as to whether we act as a principal or an agent when providing the services. All of the revenues involving third-party service providers providing medical examination on behalf of us are accounted for on a gross basis since we are the primary obligor, possess the latitude in establishing prices, have the discretion to select the third-party service providers and take the credit risks.

Other Services

We provide healthcare packages of bundled services principally comprising a combination of the above services — medical examination, disease screening and other services — to our corporate customers. The healthcare package normally expires within one year from the date of purchase and does not include right of return.

We allocate revenues from the sale of bundled services to each of the revenue streams discussed above using the relative selling price of each component service based on our best estimate. Revenue recognition criteria with respect to each component service included in the bundled services is identical to as if the component services are sold on a standalone basis.

 

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Consolidation of Variable Interest Entities

Foreign ownership of healthcare and Internet-based businesses in China is subject to significant restrictions under current PRC laws and regulations. The PRC government regulates these industries through strict business licensing requirements and other government regulations. These laws and regulations also include limitations on foreign ownership in PRC companies that operate healthcare and Internet-based businesses. Specifically, foreign investment in Internet-based businesses is categorized as “restricted” and foreign investors are not allowed to own more than a 50% equity interest in an entity conducting an Internet-based business pursuant to the Administrative Rules for Foreign Investment in Telecommunication Enterprises. Also, foreign investment in the healthcare industry was categorized as “restricted” and foreign investors were not allowed to own more than a 70% equity interest in an entity conducting a healthcare-based business pursuant to the Interim Measures for Administration of Sino-foreign Joint Venture and Cooperative Medical Institutions which took effect in July 2000. In addition, the Interim Measures for Administration of Sino-foreign Joint Venture and Cooperative Medical Institutions also set certain qualification requirements for foreign investors, such as requiring such investors’ possession of and investment and operation experience in the medical sector. Although a December 2011 amendment to the Catalog of Industries for Guiding Foreign Investment recategorized foreign investment in the healthcare sector from “restricted” to “permitted” and various other subsequent regulations and rules state that restrictions on foreign investment in the healthcare sector should be lifted, restrictions on foreign investment in the healthcare sector still exist in practice, and the amendments have not been implemented at the provincial or municipal level in many cases and therefore many local governments continue to follow the previous rules and impose a 70% foreign ownership limit and foreign investor qualification requirements when approving and registering medical institutions. See “Regulation—Regulations Relating to Foreign Investment in the Value-Added Telecommunications Industry,” and “Regulation—Regulations Relating to Foreign Investment in Our Industry.” Therefore we still operated through our VIE entities. Beijing iKang, Zhejiang iKang and Yuanhua WFOE hold the power to direct the activities of the VIE entities that most significantly affect our economic performance and bear the economic risks and receive the economic benefits of the VIE entities through a series of contractual arrangements with iKang Holding, iKang Hangzhou Xixi, Yuanhua Information and Beijing Jiandatong and/or their nominee shareholders, including:

 

   

exclusive business cooperation agreement;

 

   

exclusive call option agreement;

 

   

share pledge agreement;

 

   

powers of attorney; and

 

   

spousal consent letter.

We believe these contractual arrangements are currently legally enforceable under PRC laws and regulations. More specifically, we believe the terms of the exclusive call option agreements give us substantive kick-out rights so that we can have the power to control nominee shareholders of iKang Holding, iKang Hangzhou Xixi, Yuanhua Information and Beijing Jiandatong and thus the power to direct the activities that most significantly impact the VIE entities’ economic performance. Through these contractual agreements, we believe that the nominee shareholders of iKang Holding, iKang Hangzhou Xixi, Yuanhua Information and Beijing Jiandatong do not have direct or indirect ability to make decisions regarding the activities of the VIE entities that could have a significant impact on the economic performance of the VIE entities because all of the voting rights of the nominee shareholders of iKang Holding, iKang Hangzhou Xixi, Yuanhua Information and Beijing Jiandatong have been contractually transferred to Beijing iKang, Zhejiang iKang and Yuanhua WFOE, respectively. Therefore, we have effective control over the VIE entities. In addition, we believe that our ability to exercise effective control, together with the exclusive business cooperation agreements and the share pledge agreements, give us the rights to receive substantially all, or in the case of Beijing Jiandatong, a majority of the economic benefits from the VIE entities. Hence, we believe that the nominee shareholders of iKang Holding, iKang Hangzhou Xixi, Yuanhua Information and Beijing Jiandatong do not have the rights to receive the expected residual returns of those VIE entities, as such rights have been transferred to Beijing iKang, Zhejiang

 

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iKang and Yuanhua WFOE. Therefore, we evaluated the rights we obtained through entering into these contractual arrangements and concluded we have the power to direct the activities that most significantly affect the VIE entities’ economic performance and also have the rights to receive the economic benefits of the VIE entities that could be significant to the VIE entities. Accordingly, we are the primary beneficiary of the VIE entities and have consolidated the financial results of the VIE entities in our consolidated financial statements since the later of the date of acquisition and incorporation.

We believe that the possibilities are remote that any oversight or regulatory bodies in China would question the enforceability of the contractual arrangements with iKang Holding, iKang Hangzhou Xixi, Yuanhua Information and Beijing Jiandatong pursuant to the current PRC laws. The shareholders of iKang Holding are also our shareholders and therefore have no current interest in acting contrary to the contractual arrangements. However, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements and if the shareholders of iKang Holding were to reduce their shareholdings in our company, their interests may diverge from our interests, which may increase the risk that they would act contrary to the contractual arrangements, such as causing the VIE entities to not pay service fees under the contractual arrangements when required to do so. See “Risk Factors — Risks Related to Our Corporate Structure — If the PRC government finds that the agreements that establish the structure for operating our business in China do not comply with its restrictions on foreign investment in healthcare and Internet-related businesses